European Investment Opportunities

There’s really a very good case to be made for shifting your money into Europe this year. Although we wouldn’t want to exaggerate Europe’s ability to detach itself from the fate of the US economy, we’re not alone in thinking that its fundamentals are altogether more healthy than those of the US.

It doesn’t have America’s hideous trade deficits; it doesn’t have such bloated expectations of its stocks; and it doesn’t rely on a big influx of fickle foreign money just to keep going. Admittedly, it has somewhat higher unemployment than the States - but then, most economists would say that America’s own low joblessness rates are too low to be really healthy or sustainable anyway.

European Investment Opportunities & Europe

If you fancy Europe but still want to hedge your bets, you could do worse than looking at the new range of index tracker funds that were launched in January by the new Euronext exchange - the first European exchange outside London to offer such a facility. Euronext, in case you haven’t heard of it, is the result of last September’s merger between the Paris, Amsterdam and Brussels stock exchanges.

European Investment Opportunities - Dow Jones Euro Stoxx 50 Index

One of the odd little things that have surfaced about Europe recently is that investors are dumping some of the safety stocks they’ve been buying over the past year, and they’re now buying riskier investments instead. During January, for instance, the average European non-cyclical stock (food retailing, drugs, health, beverages etc) lost 8 per cent of its value while cyclical stocks (automobiles, furniture, general retailing) rose by 8 per cent.

European Investment Opportunities & Computer Services

But if you think that’s a strange thing to happen in a time of looming uncertainty, take a look at what’s happened in computer services. In the first five weeks of this year, while the Nasdaq was still plagued by uncertainty, the Eurotop 300 index for software and computer services gained 21 per cent, and London’s own equivalent index improved by 20 per cent.

What’s going on? Two words - capital migration. European companies are now picking up a huge amount of interest from US investors, who see Europe as a land of continued opportunity now that things are stalling at home. The prospect of a currency gain from the euro has added extra spice to the prospect that many US institutions see in Europe’s fundamentally sounder economy. And they’ve been joined by many European investors who are also repatriating some of the cash that they’ve put into US markets over the past three years.

European Investment Opportunities - European Stock Price

Has it all been a bit overdone? Well, possibly. Look at a European stock price these days and you’re very likely to find that it commands a higher price in relation to profits than its US counterpart. Compare, for example, the price/earnings ratio of 69 that you’d pay for Germany’s SAP software consultancy, or the 57 for Britain’s Sage, with the 34 that you’d pay for Microsoft in the US, and ask yourself which has the better long-term prospects.

Or try and figure out why the troubled Daimler Chrysler motor group currently rates a p/e of 7 in Frankfurt but only 5 in New York. Could it be just the lure of the euro that’s lifting the German price by 40 per cent? Probably not. Rather, it looks as though some parts of the market are simply getting over-enthusiastic.