There are some reasons to be cautiously optimistic about Europe going forward. In the second quarter, a two-year eurozone recession that marked the longest downturn in four decades finally came to an end. And thanks to improving consumer and manufacturer data, things are looking up.
But it’s undeniable that the “recovery” is being led by Germany and France. Both posted growth above expectations in Q2, and these nations continue to be predicted as the drivers of economic expansion — and slowing economic expansion at that, with forecasts for just 0.1% growth for the euro zone in Q3 overall.
So while there might be some opportunities amid the marginal rebound in Europe in the stronger regions like Germany and France, clearly there are trouble spots that need to be avoided. Those include weak countries like Spain, Italy and Greece.
After all, despite the end of recession for the continent in Q2 there was still economic contraction in Spain and Italy. And unemployment in Greece and Spain remains at staggering levels near 26% to 27%!
Investors eager to be in on the ground floor of a recovery have bid up investments in these regions. That’s why the iShares MSCI Spain ETF (EWP) and the Global X Greece ETF (GREK) have both gapped up more than 30% since July 1 to dwarf the 9% returns for the S&P in the same period.
But that snap-back now seems overdone and has already started to fade since highs set in late October. As these regions continue to struggle, the optimism will dry up and the bubble in euro trash equities will burst.