If Europe's the Place, What's the Investment Play?

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A lot of investment advisors are calling clients now to suggest investments in Europe, and some of these conversations are probably pretty tortuous. Much of Europe, with its ongoing credit crises and 25%-ish unemployment (as in Spain) in parts, still looks like a mess unfit for conservative investors. Even bullish investment gurus occasionally describe economies there in worrisome phrases like “getting less bad.” So why should a cautious, risk-averse investor take a chance on anything over there now?

The call for increasing European exposure is coming from strategists at many major investment houses, including JPMorgan Chase (JPM), Bank of America (BAC), Societe Generale (SCGLY) and Merrill Lynch, to name a few. SocGen suggests going underweight in U.S. equities to favor Europe. JPMorgan's advice is more like it's time to stick a toe into Europe; not necessarily your neck.

They all believe that Europe is in the nascent stages of economic recovery. European GDP growth has moved, barely, into positive territory; corporations are optimistic about earnings, and most everyone in the markets found the re-election of German Chancellor Angela Merkel reassuring. Moreover, European shares are still selling for recessionary prices – near 40-year lows by some valuation measures -- at a time when bargains in the U.S. markets are getting harder to find. Investors who buy into Europe now, the theories go, should eventually reap rewards like recession-era buyers of U.S. and Japanese companies have seen recently.

^N225 data by YCharts

The fact that U.S. stocks are pricey is alone reason to look overseas.

The most frequent recommendations for European shares are in value sectors like banking, insurance and utilities, which have fallen out of favor in U.S. markets. Billionaire hedge fund manager John Paulson has amassed large stakes in a couple of Greek banks, Piraeus and Alpha, for example. But conservative investors will be looking for something less risky than small banks in a particularly weak country. Also, individual investors may prefer to avoid extra fees and invest in Europe via ADRs, or to invest in a basket of European stocks via exchange traded funds. Here's a quick look at how some investors are expanding conservative portfolios into Europe.

There are several ETFs for investing in Europe as a broad swath, such as SPDR Stoxx Europe 50 (FEU) and Vanguard FTSE Europe ETF (VGK). Their top holdings are common names like Nestle S.A. (NSRGY), Vodafone Group PLC (VOD) and other major corporations throughout Europe. The S&P 500 has been a far better investment through most of the recession, but the European ETFs have improved recently.

FEU data by YCharts

Lately, though, the better European ETF returns have come from sector or country-specific products. The iShares MSCI European Financials ETF (EUFN) has been one of the most popular avenues for investing in Europe, along with the ETF iShares MSCI Spain (EWP).

EUFN data by YCharts

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If recovery in Europe is as touch-and-go as it has been in the U.S., investors may do better picking individual companies. Shares of French energy company Total S.A. (TOT) are recommended by some 20 U.S. analysts, and they come with a 4.1% dividend yield. U.K. Bank Barclays PLC (BCS) also is well-recommended. Both trade at a forward PE ratio under 9.

TOT Forward PE Ratio data by YCharts

While using the investment research tools needed for new European investments, it's important to keep in mind the uncertainties facing the U.S. stock market, too. A poorly managed Fed taper could cause more damage in U.S. markets than their global counterparts. In that case, a little exposure to a foreign recovery would be most welcome.

Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

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