Is It Time To Buy Europe?

Eric Dutram

Clearly, the situation in the euro zone is a mess. The recent elections across the region suggest that pro-austerity policies may have to take a backseat for the time being as a more growth oriented approach is attempted.

Meanwhile, the conditions in Greece are growing extremely precarious as a coalition government seems unlikely and even if it does take place, will be a fragile one at best. This could leave the door open for more elections in the coming months, only adding to the uncertainty in the region.

Beyond politics, in the truly important economies of Spain and Italy, bond yields are once again soaring. Rates on 10 year notes for both countries are both above 5.5%, levels that are bordering on crisis proportions for both nations.

To top things off, both Italy and Spain are in recessions once again leaving these troubled nations in a bind from a fiscal policy perspective heading into the summer months (see Pain In The Spain ETF Continues).

Thanks to these issues European equities have been under severe pressure as of late. One of the more popular ETFs tracking the broad European market—the iShares MSCI-EMU Index Fund (EZU)—has lost nearly 7.8% in the past three month period compared to a positive performance in the S&P 500 during the same time frame.

Even more troubling is that healthy European economies have also seen slumping prices as of late in their markets. The most popular ETF tracking Germany—EWG—(which I own for my personal portfolio) has lost 4.3% in the past quarter while the Netherlands fund—EWN—has lost about 2.8% too.

Yet, when one compares these performances to Italian or Spanish securities, the aforementioned funds look like safe havens. ETFs focused on Spain have fallen by over 20% in the past quarter while Italian funds have slid by over 15%, demonstrating just how bad the sentiment has become about the new trouble spots in the region (read Is The Italy ETF Next?).

As bad as things are, one has to believe that some solid values are beginning to develop across the area as lower prices make PE multiples and dividend yields more attractive. While one can certainly argue that the banking sector should still be avoided in Europe, one has to wonder if other sectors deserve the rough patch that they have received in this time frame.

For example, French energy giant Total (TOT) currently has an impressive dividend of over 7% with a forward PE below 6.5. Meanwhile, German conglomerate Siemens (SI) has a 3.25% yield and a forward PE below 11, suggesting that decent values can be had in some of the top names across the region, possibly implying that the sell-off has been overdone in some cases.

The question now is; when is it time to get into these names? Should investors buy up these large caps—or broad European markets-- on hopes of a turnaround or continue to stay away for fear of more losses?

While the situation is certainly troubling right now, gains could be big if the market turns around, as we saw earlier this year or after the end of our own crisis a few years ago. After all, as was once said ‘buy when there’s blood in the streets, even if the blood is your own’

Let us know what you think in the comments below!

Read the analyst report on EWG

Read the analyst report on TOT

Read the analyst report on SI

Read the analyst report on EWN

Read the analyst report on EZU

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