Stocks and Shares

Opportunities as Europe implodes

Europe is lurching back into crisis. As I wrote recently, much of the continent is still in a full blown economic depression. This is now showing up in stock markets. Taken as a whole Western Europe is the worst performing region this year. Many important individual country stock markets are imploding. Interesting profit opportunities for selective investors are starting to appear.

For all the noise about falling stock prices in the USA, the MSCI USA index is still up 1% year-to-date. Although, as I explained on 23rd September, the US stock market looks expensive and is unlikely to be a good place to invest for the long run. (The S&P 500 index is down 5% since then, but that doesn’t change the analysis. It’s still pricey.)

During 2014 the MSCI Emerging Markets index is down a marginal 1%, which is only a slightly worse performance than the MSCI USA index. Whereas Frontier markets have been the best performers on the whole. These are the least economically and financially developed countries. The MSCI Frontier Markets index is up over 14% since the start of 2014. (Frontier markets often march to their own tune, since they are less influenced by inflows and outflows of funds from fickle Western fund managers.)

But the standout loser has been Europe. The MSCI Europe index, which covers developed country stock markets in the region, is down 10% year-to-date. And it’s down 14% since peaking in July.

(Note: when comparing markets I like to use MSCI indices. This is because they are all measured in US dollars, which means we’re comparing apples with apples. The important thing is not that the currency is the US dollar, but that the currency is the same across all indices.)

The table below summarises performance of selected MSCI country indices. It shows price performance year-to-date (in US dollars), performance since recent the 2014 peak, and the month when the peak occurred for each country. I’ve included the USA and Japan for comparison.


Here’s the same performance shown in a graph.


You can see straight away that there are some big fallers. Austria takes the lead year-to-date, down 29%. Portugal has had the biggest fall from peak, which it hit in May. It’s down 36% since then.

But those are quite small markets. However the large markets have been hard hit as well. Germany and France have both plummeted 18% since their mid-year peaks. And Italy is down 20%. The UK is the best performer of the big markets, but it’s still down 13% (unlucky for some).

It’s fair to say that European stock markets are imploding.

Many people have been touting European stocks as a cheap buying opportunity over the past year or two. I haven’t agreed with them because of the poor economic and political realities in Europe. Government debts continue to rise into the stratosphere, and support for nationalist political parties is on the rise. But it’s certainly been true that many European markets have looked relatively cheap compared with the expensive US market.

However, that doesn’t mean they’ve been cheap in absolute terms. In fact at the end of September the MSCI Europe index had a P/E ratio of 17.1 and a price-to-book (P/B ratio) of 1.8.

(P/B ratio compares the market value of a company with its net asset value, also known as book value or shareholders’ equity. Net asset value equals total assets on a company balance sheet less total liabilities. Put another way it’s everything a company owns less everything it owes. Assuming accounting is accurate, it can be thought of as the liquidation value of a business if you sold all assets and paid off all debts.)

Serious bargains usually have a P/E ratio less than 10 and a P/B ratio less than 1 (liquidation value), although prices don’t have to plunge quite that far to be attractive long term investments.

That’s far from bargain territory, despite the recent price falls. Serious bargains usually have a P/E ratio less than 10 and a P/B ratio less than 1 (liquidation value), although prices don’t have to plunge quite that far to be attractive long term investments.

So although European share prices have fallen hard, in aggregate they’re still not great value for money.

That said there are plenty of individual bargains for patient stock pickers. In particular Germany looks interesting. This country of 81 million people is Europe’s political and industrial powerhouse.

One company stock you may consider is Volkswagen AG (Xetra:VOW), the huge global vehicle manufacturer headquartered in Wolfsburg, Germany.

This company manufactures vehicles under an impressive array of brands. These range right from the cheaper end (Skoda, SEAT), through the middle market (Volkswagen), through the premium end (Audi), into high-end sports cars (Porsche, Bugatti, Lamborghini) and top end luxury limousines (Bentley). Volkswagen also owns the Ducatti motorcycle business and makes trucks under the Scania and MAN names. There’s really something for everyone in there, or almost everyone.

Yet you can buy this company for a P/E less than 8 and P/B around 0.8. That’s incredibly cheap for a company of this breadth and class.

Yet you can buy this company for a P/E less than 8 and P/B around 0.8. That’s incredibly cheap for a company of this breadth and class. The dividend yield is a reasonable, if not high, 2.6%.

But note I haven’t done a deep analysis of this company, fellow OfWealthers. It’s just an idea that you can check out for yourself or discuss with your broker. But in future we’ll be introducing a service that provides in-depth analysis of the best investment opportunities we can find. Watch this space.

For now, if you’re not interested in investing in individual company shares then I found a German ETF that could be interesting. This is the First Trust Germany AlphaDex Fund (NYSE:FGM), which trades in New York.

FGM has a P/E of 11.5, P/B of 1.4 and dividend yield of 2.6%. This is a more diversified way to invest in Germany and international German businesses, currently spread across 38 individual company stocks. Volkswagen is one of its largest investments, but you also get competitors Daimler and BMW thrown in, and a cross section of other big German names across a wide range of businesses.

Given how European markets are moving at the moment I think there’s a good chance that prices will fall further before the year is out. It may not be the right time to buy just yet.

And Europe has dreadful long term fundamentals due to serious structural problems, as I’ve explained before. But that doesn’t mean it’s not worth looking for bargain opportunities in European stock markets, especially in world class global businesses. You should build a watch list and be ready to pounce when the time is right.

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.