If asked what the most important factor has been this year in the markets, Europe’s debt crisis undoubtedly would be near the top of just about everyone’s list. From Greece to Ireland to Portugal, then back to Greece, and now to Spain and Italy, the prospect of massive debt defaults, sovereign insolvency and the breakup of the eurozone all have teamed up to shove European stocks down big-time from March through May.
If, however, you’ve been watching European stocks since June, the Old World looks like a totally different equity animal than it did in the three months prior. Since then, some of the biggest and best European equity exchange-traded funds have seen big investor buying.
Let’s look at the action in three marquee funds: the Vanguard European VIPERS (NYSE:VGK), iShares Europe 350 (NYSE:IEV) and SPDR STOXX Europe 50 (NYSE:FEU).
All three of these big-cap European equity ETFs fell to their respective recent lows on June 1. Since then, all three have risen substantially. Both IEV and FEU are up about 8% from their low, while VGK has surged 11.5% above its June 1 price. From a technical perspective, the charts here of each respective fund show the spike above both the short-term, 50-day moving average, as well as the long-term, 200-day moving average.
The buying in these funds shows that not all European equities are to be avoided like the proverbial plague. It also shows that despite the barrage of constant negative headlines from Europe for virtually the past year, stocks in the space still have a lot of profit potential.
Now, last week, the big driver of equity prices in Europe — and around the world — were the comments from European Central Bank President Mario Draghi. The head of the ECB said it would do “whatever it takes to preserve the euro.” That statement was widely interpreted by traders as a green light to get long European stocks, hence the spike higher in all three of these funds last Thursday and Friday.
The Draghi comments also caused bond yields in troubled Spain to come down significantly. The cost of borrowing in Spain is a key barometer as to the confidence level over the survival of the EU, and the dramatic fall in this metric shows that traders are growing more comfortable with the idea that the ECB actually will step in and provide enough liquidity to backstop ailing Europe.
We’ll know a lot more about what the ECB does on Thursday, as the central bank holds an all-important policy meeting. If Draghi can deliver on what has been interpreted as a promise to do what is required to get Europe back on its feet, this could be precisely the right time to get in on the European equity ETF rally.
If, however, Draghi fails to back up his rhetoric with substantive policy action, European ETFs could come tumbling down.
Interestingly, even if European stocks see a sell-off on a “Draghi disappointment,” it won’t mean you can’t or shouldn’t get in on the sector. In fact, it might just translate into an incredible chance to go bargain hunting in some of Europe’s best stocks. We’re talking about names like Nestle (PINK:NSRGY), Vodafone (NASDAQ:VOD), BP (NYSE:BP), HSBC Holdings (NYSE:HBC), Royal Dutch Shell (NYSE:RDS.A, RDS.B), GlaxoSmithKline (NYSE:GSK) and many other stalwart European names that likely will remain strong even through Europe’s dimmest days. These stocks all make up some of the top holdings in VGK, IEV and FEU, so you can’t go wrong with any one of the three.
Perhaps the best part of the equation here is that investors also can collect a great yield on all three of these funds. IEV offers a 3.78% yield, while FEU is yielding 4.21%. VGK is not only the strongest performer of late; it also boasts a yield of 4.48%.
The way I see it, whatever happens in European stocks over the next several days, investors are in a no-lose situation.
As of this writing, Jim Woods did not hold a position in any of the aforementioned securities.