S&P on Europe: Better to Be in Than Out

There’s nothing like the threat of multiple sovereign defaults and near-zero economic growth to dim a region’s investment attraction, so it’s no wonder that Europe has been about the last place anyone wants to put their money lately.

While still a great place for vacations, just about everything that could go wrong economically for Europe has gone wrong: multiple sovereign bailouts, a recessionary economy, inflexible labor markets, large government bureaucracies, and a persistently strong common currency that has prevented ailing nations from devaluing their way out of trouble to name but a few.

With all of that to contend with, it comes as something of a surprise that European equity have posted strong gains for the year to date, even as the region’s economic activity slows.

The European Central Bank’s move in December to provide low interest loans to banks has had the dual affect of easing concerns about a credit crunch caused by the banks hoarding cash to stay solvent, and lowering short term interest rates that will hopefully help stimulate borrowing and presumably growth. Also, government officials and private investors have reportedly reached an agreement to avoid a default on Greece’s sovereign debt, which could have forced Greece out of the euro and undermined the solvency of the region’s banks.

While still well aware of the region’s problems, S&P Capital IQ has turned more positive on Europe recently, citing the overwhelmingly negative sentiment among investors and the ECB’s move to ease pressure on banks.

“We have become incrementally more positive,” says Robert Quinn, S&P Capital IQ’s chief European equity strategist. “Our core message is: don’t chase the market, but don’t not be in it.” In view of his outlook, he recently upgraded his recommendation for European information technology stocks to overweight, and cut the defensively-postured telecom sector to marketweight.

Euro-ETF Plays

If you want to “be in it,” there are of course many different ways to go. There are currently more than 20 exchange traded funds focused on Europe, though most of them are individual country funds. For a broad exposure to Europe from an ETF, it would be hard to beat the Vanguard MSCI Europe ETF (VGK), which tracks the MSCI Europe Index of about 460 stocks. The fund has $6.1 billion in assets (across multiple share classes including a traditional mutual fund) and has average daily trading volume of more than 2 million shares. U.K.-based companies have the largest geographical allocation, with about 36% of assets as of year end 2011, followed by France at 14% and Switzerland at 13%.

With so much turmoil in the region, however, the benefit of an active manager makes sense.