Tuesday, 21 July 2015

Can Europe offer us an opportunity for short term investment?

Now that Grexit is temporarily averted through another bailout by the European Union, we finally witness some form of normality returning to most major European markets. For the past couple of months we bear witness to the Euro markets being severely shaken by concerns that Greece could default on their loan and ultimately "exit" the European Union.

Benchmark index such as the EURO STOXX 50 was dragged down by fearful investor sentiments over the Greek issue. Since April 2015, the index was bearish right up till early July 2015 as shown below:


Fortunately after several marathon sessions of negotiation between Greece and the leaders from the European Union, another bailout deal was agreed upon, albeit with stricter austerity measures being imposed on Greeks. In other words, normalcy has been restored (at least for now) and the nerves of many fearful investors have been calmed.

Now that the Greek treat has subsided, let us take a look at a few key reasons that makes Europe attractive for us investors. 

Reason 1 : Cheaper Valuation
Index wise, the Euro STOXX 50 is trading at 15.8 times estimated earnings. Despite being up from 12.6 times in January.it is still low as compared to US equities earnings (S&P 500 is trading at 18.0 times).

In terms of country, the two key European countries, Germany and France have evaluations below the Global Average. In addition UK which is part of the European Union also has an evaluation that is slightly lower to the Global Average. All three countries are attractive for investment epsecially when compared against the United States and Japan.

Evaluation for Market at Developed Countries

Reason 2 : European Central Bank (ECB) injecting 1.1 trillion stimulus
In an attempt to boost euro zone economy, the ECB which is lead by the optimistic Mario Draghi. has launched a bond buying program since March 2015. This program which is a form of Quantitative Easing (QE) will inject 1.1 trillion euros into Eurozone through gradual buying of bank bonds as well as private and public sector debts of eurozone countries. It is estimated that 60 billion euros will be spent on a monthly basis from March 2015 till September 2016.

Why QE? Here's a simple illustration on what ECB is trying to create:

QE concept courtesy of BBC.com 
The announcement of the 1.1 trillion euro stimulus has also dragged the euro lower vs the US dollar. So far the ECB’s bond buying weakened the euro as much as 14 percent against the dollar this year. That helped push up exports in the first quarter, leading to a 0.4 percent growth in the region’s gross domestic product

Reason 3 : Positive corporate earnings expected!
A flurry of corporate earnings are scheduled to be announced this week. The big guns from Euro STOXX 50 such as SAP SE, Novartis AG and Daimler AG. Lenders Banco Santander SA, Deutsche Bank AG and BNP Paribas SA will post earnings next week. It is expected that automobile companies and banks will be announcing major increase in earnings. 

Grexit averted, cheaper evaluations, massive QE as well as improved corporate earnings, Europe is fast turning into an attractive area for investment as compared to other developed and emerging countries.  Despite all the attractive points highlighted, I would still urge you to carry out additional research before investing. 

Lastly if you like to invest into Europe, my recommendation is for you to invest via a unit trust fund that has exposure into companies listed in the Euro STOXX 50. I already have a fund in mind that I would like to recommend you to check it out. However as usual, I will not be publishing the fund's name here in order to prevent bias. If you like to find out the fund's name, just drop me an email at shanesee03@gmail.com

That's all from me! 

Cheers and happy investing!

P.S : If Europe is not your cup of tea, you can also check out other unit trust funds investing in other countries. These funds are also currently undergoing a 0% sales charge promotion. Further details available HERE.

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