Despite Setbacks, Europe Is Still in Vogue

Given the political and economic uncertainty facing Germany and the European Union, should Americans still be investing in the region?

The answer, money managers and others say, is, “Yes.”

Stocks on the continent continue to be cheaper than those in the U.S., and prospects for economic growth in at least parts of the old country seem a bit brighter than on this side of the Atlantic, observers say.

In addition, they doubt that the election of a new German chancellor and the earlier rejection of the proposed EU constitution by French and Dutch voters will have any significant effect on European companies, at least in the short term.

“There is value in European stocks,” says Clive McDonnell, a strategist for Standard & Poor’s who follows Europe. Historically, these stocks have carried lower price-to-earnings ratios than U.S. equities, but because the American economy is likely to slow down, European stocks look more attractive, he says.

McDonnell’s thoughts are echoed by Kurt Umbarger, a portfolio specialist for non-U.S. equities with T.Rowe Price Group (TROW). European stock valuations are “probably the most attractive in the developed world,” and “they’re certainly more inexpensive than what you find on a case-by-case basis here in the states,” he says.

In terms of performance, European stocks have been topping their U.S. counterparts lately. The S&P 500 index, a broad gauge of U.S. stocks, was down 2% this year through Monday, while the S&P Europe 350 index was up 16.1%.

Umbarger also maintains that corporate earnings by European companies have been surprisingly good for more than a year, in part because they have been restructuring their operations, and strengthening their balance sheets.

Looking at the deal that would allow Angela Merkel, leader of the conservative Christian Democrats, to become Germany’s chancellor in a coalition government, McDonnell sees the deal having no short-term impact on stocks there.

Under the agreement, key ministeries like finance and labor will continue to be controlled by the Social Democrats. That “could be perceived negatively by the market,” in the long run, “but we’ll wait and see,” McDonnell says.

Similarly, Penny Dobkin, who manages the $8.6-billion Fidelity Advisor Diversified International Fund/A (FDVAX), sees the end of Germany’s political deadlock having little impact on stocks there. “It’s not necessary to be bullish on Germany,” Dobkin says of the deal enabling Merkel to become the country’s first woman chancellor.

McDonnell, Dobkin and Umbarger also say they do not view the outcome of the French and Dutch referendums on the proposed EU constitution as a significant issue for investors. McDonnell noted that the union has started negotiations to include Turkey as a member, indicating that it can function without the new constitution.

Looking at economic growth in Europe, Umbarger says that although it has been anemic in France, Germany and Italy, “peripheral markets” like Greece, Ireland and Spain have been expanding more robustly.