European Stocks Look Ready to Roar


While U.S. stocks have been stuck in a tailspin amid the government shutdown and impending debt ceiling deadline, there's been a surprising winner in global equity markets: Europe. The continent that's been synonymous with volatility and uncertainty for the past few years seems to be finally emerging from its financial dark age.

Bond yields in the eurozone's troubled economies have fallen. Manufacturing and consumer confidence gauges have reached highs not seen since the summer of 2011. Major investors are taking notice. Goldman Sachs Asset Management, for instance, doubled its investments in European stocks over the summer . Even Greece, the epitome of the eurozone crisis, said it sees its economy growing next year for the first time in six years. With the S&P 500 up as much as 20% at one point this year, perhaps it's no surprise that American stocks have gotten all the attention, but the STOXX 50, a proxy for the European market that includes heavyweights like BMW, Danone, and Deutsche Bank, isn't far behind.

^GSPC Chart
^GSPC Chart

^GSPC data by YCharts.

And in the last three months, when indicators in Europe have started to pick up, the STOXX has been flying.

^GSPC Chart
^GSPC Chart

^GSPC data by YCharts.

Long-suffering individual stocks in Europe also seem to be making a comeback. Telefonica , the Spanish telecom giant, recently hit an 18-month high as it agreed to up its stake in Telecom Italia from 46% to 70 %, but it also seems to be benefiting from Spain's reawakening economy. Prime Minister Mariano Rajoy noted recently that bond rates have come down, and the economy is projected to grow 0.7% next year, which would be the strongest level of growth since before the financial crisis . With a huge debt load on its books, Telefonica stands to benefit from lower interest rates. Orange , formerly known as France Telecom, has ridden a similar wave, gaining nearly 40% in the last three months as the stock seems to have been energized by the Vodafone-Verizon deal. The beaten-down value play also seems to be reacting to stronger economic news out of France, where GDP growth recently hit its highest mark in more than two years .

Finally, Dryships , the Greek shipping company has jumped more than 70% since August, hitting 18-month highs in the process. Dryships' rise has tracked with the general gain in the sector as Chinese iron ore imports seem to be driving increased demand for shipping services. Still, improving factory orders on the continent and a stabilizing financial outlook in Greece figure to aid the shipper in its recovery.

No time like the present
Critics who point out that the European economy is far from healthy are right. Unemployment in Spain and Greece is still well above 20%, and GDP growth under 1% would generally be considered pathetic, but the naysayers are missing the point. The first steps out of a recession are often the best time to buy. The U.S. economy was in shambles in March 2009. The unemployment rate was more than 8% and skyrocketing, weekly initial unemployment claims topped 650,000, and stock values had been slashed in half in just six months . But that moment turned out to be the best time to invest in more than a decade as the S&P 500 has doubled since then. Stocks are a leading economic indicator, after all, and initial upticks in the market are generally a sign of improving confidence reflected in economic trends. When it comes to economic data, the direction is often more important than the number.

European stocks are also cheaper than their American equivalents. The current P/E of the MSCI Europe is just 15.5, compared to 17.1 for the S&P 500, and the European fund offers a significantly better dividend yield at 3.4% compared to 2.1%. Using a longer view, the European market again wins. Based on the P/E 10, which accounts for the last 10 years of earnings to smooth out cycles, European equities are 35% cheaper than their American counterparts, at 15 vs. 23 .

Foolish takeaway
The U.S. economy has still not fully recovered, but stocks are at all-time highs. Optimism remains, the current government standoff notwithstanding. In Europe, the lingering financial crisis in countries like Spain and Greece prevented the stock market recovery that we had in the U.S., and equities are still a third below their peak before the financial crisis . As the recession fades into the horizon and the economy continues to strengthen, Europe could offer a surprising bounty for investors willing to cross the pond.

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Fool contributor Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Orange (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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