Europe Wakes Up

Europe has been overall a terrible place to invest for the last several years. The Vanguard FTSE Europe ETF (VGK) that I use as a proxy for European stock markets overall is lower than it was at the end of 2009, well over 5 years ago, and is still roughly 30% lower than it was in the summer of 2008, coming up on 7 years ago.

It is a reflection of how poorly the tax and regulation-heavy European Union has done with changing to deal with the financial crisis of 2008 and its aftermath. Germany and Switzerland, the Scandinavian countries and some other countries like Ireland have done better than the average but southern Europe has pulled them down.

The “haves” have had a lot of demand for their securities, especially their government bonds, and now quite a few of the better European government bonds are selling at premiums to face value that exceed the value of what investors will receive in interest unti maturity. In other words, investors are willingly losing money buying those in terms of interest but are either gambling on the bonds’ prices going even higher and making some profits that way, or investors just want to park their money somewhere they see as safe and are willing to lose a little money to do that. That is an extremely unusual and sustainable situation.

Now, European stock markets, which I have almost totally avoided for several years are finally waking up and significantly outperforming the U.S. stock market so far in 2014. It may be time to put some money in Europe.

Why should you invest there, when their economy is still so sluggish? Three reasons:

Stocks are overall signficantly cheaper in Europe than in the U.S.
A rapidly falling Euro (the European Union currency) has recently fallen from $1.32 to $1.07 and that should boost exports and profits
The European Central Bank is taking a page from our Federal Reserve and providing massive monetary stimulus. Here, that stimulus resulted in much higher stock prices and it looks like the same is happening there.

This is stil speculative and not for everyone. You should remember that our U.S. currency is rising in value and that means you will likely lose money on the currency translation. Hopefully, that is made up with good stock market returns in Europe.

Emerging markets around the world are down sharply so far this year and unless you a long time frame, should generally be avoided.

The U.S. market has been up nicely the last two years, at least for large companies. The same rising dollar will hurt profits for many large U.S. companies that have operations around the world. Expect this year to be a little tougher than what we have seen lately, though predicting the market’s return over the next 12 months is very hard to do for anyone, even professionals.

Another upside to this is that if you are well enough off to travel to Europe, your U.S. dollar goes almost 20% farther than it did just a few months ago. Once you get past the air fare, Europe is actually no more expensive to vacation in than the U.S., even less expensive in some countries. Now is the time to go. Follow the recommendations in a Rick Steves guidebook and two of you can go for $2,000-$2,500 in total expenses for a 10-day vacation in Europe after air fare, less if you work at it. Venice, anyone?