In comparing European stocks to their U.S. counterparts, 2015 and 2016 couldn’t be more different.
In 2015, European stocks beat U.S. stocks by the greatest disparity in a decade. But 2016 is off to a very different start – European equities are lagging U.S. equities by the widest gap since 2003.
Euro-stocks are in the worst state they’ve been since the global financial crisis in 2009.
The Stoxx Europe 600 Index finished the first quarter down 7.7%. Led lower by banks, a whopping 18 of the 19 industry groups comprising the index fell.
This chart – mapping European stock percentage points since their 2003 low – paints a very clear picture of the similarities between that fallout and our current year.
Over a Decade of Descent
There are several causes behind the current European stock decline.
One reason is that the overall economy is barely moving, in an almost Japanese manner. Europe’s economic core was pegged to grow by 0.3% in the first quarter of 2016. But even that was optimistic.
Surveys on economic growth show that investor confidence in the European economy is at a 13-month low, coinciding with the ever-declining market value.
Furthermore, analysts have drastically slashed earnings estimates for many European companies. Actual earnings declines are now forecast to continue throughout 2016.
Of course, the same earnings estimate slashes occurred here in the U.S. The primary difference however, is that, domestically, stocks rebounded in reaction to Fed chair Janet Yellen promising to dump even more liquidity on an already soaked Wall Street.
Therein lines yet another problem for Europe. Its currency, the euro, is too strong.
The inflated strength of the euro is due to several key factors, including: the uber-dovish Yellen pushing the dollar down, as well as the Chinese buying the euro and moving away from the dollar.
Euro strength affects nearly every sector of the European economy. European exporters, like the automakers (average stock down 11%) have been crushed by the disproportionately strong euro/weak dollar. Even the healthcare sector, typically a more stable industry than others, has suffered its worst quarter in eight years.
Perhaps, if they’re lucky, currency weakness from a Brexit may actually boost European exports.
Finally, there is the problem of European banks.
Their fall from grace has only accelerated due to concerns regarding their disappearing profitability, which seems to be spiraling into the negative interest rate black hole.
More than a third of the Stoxx 600 lenders are down more than 20% this year.
Euro Stocks on the Cheap
On the bright side, the subsequent selloff, so far this year, has greatly cleaned European stocks on the whole.
The Stoxx 600 is trading at less than 15 times earnings, below its historical average. Plus, it’s trading at an 11% discount to the S&P 500 Index.
In addition, dividend yields are now higher in Europe with an average blue-chip yield of 3.4%. Compare this to 2.2% for the S&P 500 Index.
To me, the discounted rates of European stocks, when compared to the U.S. prices, and their higher yield make for an interesting and exciting time to invest in Europe.
The easiest way to play a broad basket of high-quality European shares is through an exchange-traded fund.
The European ETF
One great example is the O’Shares FTSE Europe Quality Dividend ETF (OEUR). The chairman of O’Shares Investments is Kevin O’Leary, “Mr. Wonderful” of Shark Tank.
FTSE Russell screens European stocks for high quality and low volatility, along with dividend yield.
This screening resulted in the fund having only about 10% in financials, 12% in energy, and less than 5% in basic materials.
The top sectors in the fund are consumer goods and health care, which make up 35.3% of OEUR.
With all the blue chips in this ETF, this is a prime opportunity for investors to wait for a reversion to the mean, as European stocks attempt to eventually catch up with the U.S.