It is very easy to be pessimistic about Europe. Headline inflation followed a lower path through most of 2014. Deflation is a valid concern.
The crazy Russians and the Ukraine crisis. The slowing world demand drained all economic momentum. And in Greece the left wing Syriza party has been elected and is determined to increase public spending that puts it on a collision course with the EU. Current tailwinds will be relatively short lived.
Is the Eurozone economy condemned to a long period of stagnation and deflation? Or, is now the time to invest in Europe when many scenarios look gloomy? It is easy to be pessimistic about the Eurozone prospects. At the same time there are some compelling reasons to begin wading into the Eurozone. Here are a few of those reasons.
The European Central Bank is embarking on quantitative easing. The central bankers are providing the stimulus and adopting unconventional measures in an effort to increase prices. They announced in January that they will buy $1.13 trillion in euros mostly government bonds beginning in March. Yes, they are printing money similar to what we have done in this country. This is an attempt to hold off a further rise in deflation. Deflation is often defined as a prolonged and broad based decline in prices that depresses economic activity.
The huge drop in energy prices experienced in recent months will provide a real boost to real income and consumption.
The euro has depreciated about 10 percent over the past year. That should give a boost to exports. A weaker currency can improve a company's earnings when selling their products abroad.
Many of the current tailwinds will be fairly short lived. Over the longer term structural reforms hold the key to improving growth in Europe. Spain has already begun to outperform over the past year partially because of labor market reforms enacted during the crisis. It is likely
to again perform strongly this year. Even the prospects for Italy are turning more optimistic. There seems to be real progress in reforming the labor markets and the electoral system. Both of these countries have more to do to insure long term sustainability, but they have taken steps in the right direction.
I believe now is the time to invest in the Eurozone. Here are a few ideas on how to invest there.
The Vanguard FTSE Europe exchange traded fund. It holds about 500 stocks with a low turnover of about 7 percent. It has a dividend yield of approximately 4.25 percent and a low expense ratio of 0.12 percent. It is currently trading at around $56 per share. It is up a little over 6 percent year to date. Morningstar gives this ETF three stars.
The WisdomTree Europe Hedged Equity exchange traded fund. It holds only about 125 stocks and has a relatively modest turnover ratio of 28 percent. Its dividend yield is approximately 1.90 percent. Its expense ratio is rather steep at 0.58 percent. It has recently been trading at about $63 per share. It is more than 12 percent year to date. Morningstar gives this ETF five stars.
These are two of many ways to invest in the Eurozone. Mutual funds and individual equities are other ways to invest.
Investing always requires risk. There are many risks in Europe with the highest being political. But waiting for the all clear sign does not typically work. I believe now is the time to begin testing the waters in Europe. Be smart, wade in slowly. Invest some now with the thought of investing more should things continue to improve.
Michael T. Doll, an investment adviser with the Longboat Key Financial Group, can be reached at 941-383-2300, ext. 6, or Michaeltdoll@longboatkeyfinancial.com.