Europe’s era of perpetual crises appears to be fading, and the Continent’s largest economies are coming back to life. One key measure of health, the Eurozone’s Purchasing Manager’s Index (PMI), moved up to 50.5 in July, it’s best showing in two years. Any move above 50.0 signals economic expansion.
To be sure, Europe’s recovery will be slow. Economists now think that European economies will grow a collective 0.2 percent by the fourth quarter of 2013, before modestly accelerating throughout 2014. Still, S&P Capital IQ Global Equity Strategist Alec Young thinks Europe is entering a “Goldilocks” phase for investors. “While the U.S. market is showing fears of the end of Fed stimulus (also known as tapering), growth is still too weak in Europe to think about that,” he says, adding that the ECB has said that aggressive monetary policy will stay in place for the foreseeable future.
The key to a renaissance for European stocks is a gradual change in sentiment, as most investors remain dubious that Europe can rise from the ashes. Young sees the negative sentiment as an opportunity. “By the time every one likes an investment, you can’t really get alpha,” he suggests. “It's our favorite global market, and we haven't said that for quite some time.”
David Mazza, head of ETF investment strategy at State Street Global Advisors, also thinks Europe is becoming quite timely. “Investors have used the past few months to re-assess the role that Europe should play in their portfolio,” he says.
Case in point: The SPDR EURO STOXX 50 ETF (FEZ), which State Street acts as an advisor, has seen its assets under management nearly double in 2013, to roughly $2.9 billion.
To be sure, European stocks have already risen roughly 10% in 2013, leading to concerns that further upside will be hard to achieve. Jeremy Schwartz, research director at Wisdom Tree Investments, dispels that notion: “Sure, [European stocks] have moved up quite a bit recently, but most major European indices remain below where they were five years ago,” he says. In contrast, the S&P 500 is up more than 30 percent in that time.
Two Paths
ETF investors looking for ways to profit from a resurgent Europe can take two paths. Most ETFs focus on large European multi-nationals that should benefit from a rebound in both Europe and the global economy, while small-cap focused ETFs more squarely focus on European economic activity. S&P Capital IQ’s Young highlights the appeal of the latter approach. “Coming out of a recession, there is always a lot of pent up demand, both in terms of corporate capital spending and domestic consumption.”
The companies in the WisdomTree Europe SmallCap Dividend ETF (DFE) derive roughly 80 percent of their revenue from Europe. Industrial firms (23 percent weighting), technology stocks (15 percent) and consumer cyclicals (15 percent) make up the bulk of the fund.
This fund, which carries a 0.58 percent expense ratio, sports a 3.7 percent 30-day SEC yield.