Look for these European Stocks to Exert a Lot of Horsepower
August 30, 2013
by Frank Holmes, Chief Investment Officer, U.S. Global Investors
The Wall Street Journal recently published an article, “Emerging Europe is a Haven in Selloff,” highlighting the region’s recent success in “rising above the storm” that other developing markets have not been able to avoid.
Dark clouds have been swirling around emerging markets, with the MSCI Emerging Markets Index falling about 12 percent on a year-to-date basis.
We’ve been expecting a bounce in Europe’s emerging markets for some time now. In the Investor Alert a few weeks ago, we talked about how the area has lagged over the past five years. Since July 2008, the MSCI Emerging Market Eastern Europe Index has persistently underperformed the overall emerging market index.
This underperformance happened seemingly through no fault of their own. As we’ve discussed, Eastern Europe has been an area of strength, with a rising middle class, low unemployment and a relatively strong economy. Rather, companies in these countries have suffered “guilt by association” due to their proximity to their Western neighbors.
Eastern Europe is very export dependent on developed Europe. More than 80 percent of Czech and Hungarian exports and about 50 percent of Polish and Turkish goods head to Western Europe.
So with economic data in Europe turning positive, many investors including our team are “betting that Western Europe's return to growth after a year-and-a-half-long recession will fuel demand for cars, appliances and other goods manufactured in Eastern Europe,” says the WSJ.
This could be a powerful engine to set emerging Europe on a huge upward trajectory, closing the performance gap and even outperforming its peers.
Additional research suggests stocks in emerging Europe could exert even more horsepower.
According to Bank of America Merrill Lynch, stocks in the European Union area historically outperformed when U.S. interest rates rose. Over the last 40 years during periods of rising rates in the U.S., European stocks took a hit up to six months prior to the Federal Reserve raising rates. However, six and 12 months after the Fed began its rate increases, European equities have taken off.
With the likelihood for rising rates and an improving Europe in our future, this research makes a strong case that emerging European companies will be experiencing a “growth by association.”
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