As we all know, the French elections occurred this past Sunday, and Emmanuel Macron defeated Marine Le Pen handily in a heavily contested race for the French Presidency. With this being said, is now a good time to get into European stocks? Well, let’s analyze what large fund managers have been doing recently. According to Investing.com, institutional investors have moved $7 billion out of US-based ETF’s and have been precipitously reallocating the funds into European-based ETF’s. Approximately $400 million flowed into European-based ETF’s just last week, alone. This money flow action shows us that large fund managers believe US stocks are already fully priced and European stocks have more upside potential.
Recent valuation models show Price-to-Earnings (PE) ratios for US stocks in the realm of 28X earnings, whereas European stocks show a 17.6X earnings for Developed Europe, and an 8X multiple for Emerging Europe. Dividend yields are much more attractive in European stocks, averaging a yield of about 3%, whereas US stocks are only averaging a one percent yield. It’s not hard to discern that investments outside of the US is the place to be. In fact, pretty much all emerging market investments are more attractive than US stocks, in a comparison basis, by similar valuation models mentioned above. The PE ratio for overall emerging markets is about 15X earnings.
So, what should you do with your money? I mean European Stocks already made a relatively big run in the past months, and the Big Boys have already moved a chunk of their money into these markets. Aren’t we a little bit too late to get into the action? The answer to this question is: Absolutely, Not.
In an interview with Wilmington Trust fund manager, Robert S. Bridges, Jr. CFA, states that European and Emerging Market investments are still way more attractive than American investments, and many of these foreign issues are still exceedingly undervalued, with lot’s of upside potential. Warren Buffett, the Oracle of Omaha and the World’s Greatest Investor, along with David Tepper, have placed billions of dollars into European companies. They are still looking for opportunities in both Developed and Emerging European markets. If these big time investment gurus are placing their fortunes in Europe, then perhaps it’s time for us to place some of our money in this part of the world.
Of course, with the French Election behind us, most people feel that the geopolitical risks associated with a European Union (EU) breakup, and Putin’s effectiveness on interfering with Democracy, are not as worrisome as what we all thought a few weeks ago. It seems like the polls are trustworthy and dependable again. Many people anticipate the Italian and German Elections are going to favor a Pro-EU agenda going forward. This is absolutely great news for the European markets because stability and predictability usually leads to steady upward movement in the markets.
The Vanguard FTSE Europe ETF (VGK) is a great ETF to get in right now. Since this fund contains more than 1,270 companies, expanding all over Europe, there’s no need to worry about diversification. Fees are very minimal…in fact; this is the lowest cost European ETF you could find in the US Stock Exchanges. Perhaps the best way to invest with this fund is to dollar-cost-average your investment over time. For those who like risk, there is the Direxion Daily FTSE Europe Bull 3X ETF. This fund replicates 300% of the daily performance of the FTSE Developed Europe All Cap Index. So, if the Developed Europe Index moves up one percent for the day, then this ETF would move up three percent for the day. Since the fund measures the daily performance of the index, the ETF “resets” it’s price movement every day, hence creating exponential growth (or decay) in your investment over time. Please be advised to not invest in leveraged 3X ETF’s, expecially in longer time frames, unless you absolutely know what you are doing with your investment.