It looks like Congress and the president still haven’t figured out even a short-term deal to avoid a technical default on America’s debts. But even should one materialize ahead of the debt ceiling deadline, the damage has been done, and Americans have lost faith in the ability of their leaders to govern.
Thus far, U.S. stocks have held up remarkably well, as they did during the government shutdowns of the 1990s. But with debt ceiling standoffs starting to lose their theatrical effect, it might be just a matter of time before one party or the other steps it up a notch and pushes into default.
If you want to see what a loss of faith in government can do to a stock market, take a look at some of Europe’s hardest-hit markets. Specifically, let’s talk about Spain.
The Ibex 35 — the Spanish equivalent of the Dow Jones Industrial Average here — lost half of its value from its early 2010 peak to its summer 2012 trough as the eurozone sovereign debt crisis broke out. And this was after it had already lost half its value during the 2008-09 meltdown.
That’s not just a bear market — that’s fear that the world as you know it is ending. In the case of Europe, it meant the disintegration of the eurozone.
The good news is that these sorts of crises create great buying opportunities.
We might or might not have a crisis here in the United States; the market has shown very little in the way of panic. But in Europe, they already are on the other side of it. They’ve had their crisis.
After five years of nearly continuous panic and turmoil, European markets reached that point of crisis fatigue when the only way to go is up. Valuations are cheap, and there is no one left to sell.
Earlier this month, I made my case for investing in Europe. European shares are significantly cheaper than American stocks, and the bond market is in a stable equilibrium with support from the European Central Bank. Europe is also emerging from recession (albeit slowly), and European multinationals have great exposure to emerging markets — which also are showing signs of bottoming.
Drilling down to the country level, I’ve been strongly recommending Spanish stocks in the Sizemore Investment Letter for the past 15 months. I reiterate that call today.
Spain has the highest dividend yield of any major world market, at 4.7%. Looking at trailing price-to-earnings valuations, Spanish stocks look modestly on the pricey side, at 18.7. But remember, Spanish earnings have been depressed by a deep, multiyear recession. Using the Shiller cyclically adjusted P/E of about 9, Spain is one of the cheapest markets in the world, priced at about half its long-term average.
Spanish stocks have been on fire of late, so you might want to average in or buy on dips. But by all means, take advantage of the crisis pricing we have on offer today. It might well be decades before we see it again.
To get exposure you can buy a basket of solid Spanish blue chips, or you can pick up shares of the iShares MSCI Spain ETF (EWP). EWP is heavily weighted in financials — Banco Santander (SAN) and Banco Bilbao Vizcaya Argentaria (BBVA) alone account for more than 30% of the fund — and Spanish telecom Telefonica (TEF) also has a large 13% weighting. EWP charges 0.53% in annual expenses, or $53 of every $10,000 invested.
Again, I should emphasize that Spain and the rest of Europe are emerging from crisis. The panic selling has long since been exhausted, and European shares are largely underowned and underfollowed by investors.
It might seem absurd to say it, but Europe — the land of brutal budget austerity, double-digit unemployment and street riots — is less risky than the United States at this time.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long EWP. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.