by Jeff Reeves | September 20, 2012 9:39 am
Many investors simply don’t trust the equities rally in 2012. There’s grumbling about both the unlimited scope and ineffectiveness of QE3. There’s fear of a prolonged recession in Europe fueled by austerity and debt troubles, and risks of a similar disaster in the U.S., thanks to the “fiscal cliff.” There’s talk of a hard landing in China, the risk of global inflation in commodities like oil … and so on and so on.
But the bottom line is that the S&P 500 is up about 15% year-to-date, and many highfliers continue to make investors rich. Take mega-tech stock Apple (NASDAQ:AAPL), which just set an all-time high above $700, as just the biggest example. So, maybe things aren’t as bad as some of you out there think.
And even if that rally in domestic equities is not lost on you, consider that Germany’s DAX has soared 25% so far in 2012!
Maybe it’s time you stop doubting the stock rally — not just here, but also across the Atlantic Ocean.
After all, practically speaking, if you want to ride the biggest leg up in the recovery rally, you need to be in before the all-clear sounds. Consider that in the six months after the markets bottomed in March 2009, they soared 60% in the next eight months … before getting mighty choppy. In other words, if you waited too long, you missed out.
So, allow me to start chipping away at your doubts and providing a bullish case for Europe:
At the beginning of September, the European Central Bank unveiled its Outright Monetary Transactions (OMT) plan. This is a new bond-buying scheme that will allow it to purchase theoretically unlimited amounts of short-term sovereign debt from European Union nations that need help — namely, Italy and Spain.
Following the move, Italian and Spanish bond yields slumped significantly. Consider that just a few weeks ago, the Italian 10-year was commanding a nearly 5.8% interest rate. Now it’s around a 4.9% yield. In Spain, the 10-year was yielding almost 6.9% before the OMT announcement, and now yields 5.9%. Those still are not super-attractive rates, but they dramatically reduce the burden on governments because they can borrow at more reasonable levels.
It’s also worth noting that Italian Prime Minister Mario Monti has made some tough changes, including tax hikes and targeted cuts along with pension reform, to improve the nation’s balance sheet. Some estimates project a budget surplus as high as 5% of GDP in 2013! That’s not something you hear a lot, considering the bad rap Italy gets in the press.
And of course, you have the stronger nations like Germany that have bankrolled trouble spots — and Germany’s budget remains firm, too. Consider that for the first half of this year, Berlin finished with a budgetary surplus.
It hasn’t been easy, and there have been many policy missteps on all sides during the past few years. But it’s hard to act like the eurozone is going to fall apart when tough budget decisions already are resulting in stronger financial outlooks for major economies Germany and Italy.
Angela Merkel has had a marked change in her tone, and now it appears that the EU is no longer messing with the brinksmanship it was a year ago. Talks of dissolution or kicking out debtor nations like Greece have faded, and instead are replaced by headlines like:
“I feel your pain, German leader Angela Merkel tells Greeks” or “Germany Caves In (A Little Bit)” or “Merkel Changes Her Mind on Grexit Risks.”
In short, the tough talk has faded away, and now it’s all hugs and unity instead of doomsday scenarios where debts are denominated in long-forgotten currencies like the drachma.
Amid the conflict of the past few years, the “devaluation” of the euro as a currency has been pretty constant. But those familiar with macro trends should know that weaker currencies at home mean cheaper goods abroad — thus boosting exports and helping businesses dig out of a hole where domestic consumption is flagging.
Consider that in mid-2011, the euro peaked at rate of 1 to every $1.48 in American currency. And in late July, the euro hit a low just north of $1.20 — a nearly 19% decline in roughly a year.
Naturally, that has allowed European businesses to get more competitive overseas. That isn’t enough to cure all ills, of course, but it’s definitely a tailwind worth noting.
According to a recent Bank of America (NYSE:BAC) survey, global investors are most optimistic on euro-area equities, thanks to 18 months of drama, action and theoretical solutions. Check out this from Bloomberg Businessweek:
“A net 1 percent of money managers, who together oversee $524 billion, had a so-called overweight allocation in European stocks in September, according to a report published today. That’s the first time they have owned more of the region’s shares than a represented in global benchmarks since April 2011.
‘The ECB has done an amazing job in averting disaster and investors really don’t want to stand in the way of that,’ John Bilton, European investment strategist at Bank of America’s Merrill Lynch unit, said at a press conference in London. For the first time since April 2011, Europe’s debt crisis is not investors’ biggest fear, with concern about impending fiscal tightening in the U.S. now at the forefront, he said.”
The benchmark Stoxx Europe 600 is up 12% this year to a 15-month high, Germany’s DAX has outperformed the S&P, the CAC 40 in France is up 11% year-to-date and 18% in the past 12 months … seems like investors are coming around to EU investing.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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