Europe finally emerged from its longest recession ever.
The 17-country region stretching from Germany to Greece eked out growth of 0.3 percent in the three months through June. Though some of the member nations are still hurting, any expansion is a relief after six straight quarters of contraction.
In fact, ever since Mario Draghi declared that the European Central Bank (ECB) he leads would do “whatever it takes” to preserve the euro and hold Europe together, sentiment has improved. Sure enough, there have been signs here and there of a turnaround before yesterday’s report on gross domestic product, but none so clear.
True, Europe’s economy isn’t ready to soar just yet. But European stocks have a lot of lost ground to make up because they’ve lagged their U.S. counterparts badly ever since the global financial crisis struck more than four years ago.
Consider this fact: Since the S&P 500 Index of the biggest U.S. stocks bottomed in March 2009, the benchmark is up 135.1 percent. In contrast, the Stoxx Europe 50 Index has gained only 55.5 percent.
Europe’s economy and stock market have suffered through a double-dip recession that the U.S. has so far managed to avoid. The Old Continent has been weighed down by concerns about the solvency of its banks and the shaky finances of member countries including Spain and Portugal.
As a result of the lagging performance, European stocks are undervalued relative to U.S. stocks. They also offer better earnings growth prospects because they’re exiting a black hole.
The Stoxx Europe 50 Index can be purchased for just 12.3 times this year’s estimated earnings, a healthy discount to the S&P 500′s price-to-earnings ratio (P/E) of 14.7.
Plus, European blue-chip stocks offer a much higher growth rate, with profits expected to climb 35 percent this year (to be sure, from depressed levels) and 7 percent in 2014, triple that of GDP growth.
Again, that compares favorably with estimated S&P 500 profit growth of 10.9 percent this year and just 6.3 percent in 2014.
In addition, positive surprises in European economic reports are outpacing disappointments at a faster pace, and several other leading indicators are pointing to improvements. That could lead to rising earnings estimates in the quarters ahead, creating a self-reinforcing pickup in investor sentiment. Stocks prices would follow, in that scenario.
Perhaps the best buying opportunities can be found in emerging Europe, the countries on the periphery of what was once known as Western Europe. Several of the former Eastern European economies are enjoying robust growth thanks to stronger trade ties with countries as much as 10 times their size in the region.
Poland and Turkey, for instance, are two stock markets that are worth a closer look. About half of Polish and Turkish exports are bound for Western European consumers and beyond. So faster euro-zone growth, plus brighter investor sentiment, could deliver a bigger boost to emerging European economies and stock markets.
Poland’s Warsaw Stock Exchange WIG 20 Index has a price-to-earnings ratio of just 12.3 times expected earnings and offers a dividend yield of 3.7 percent. Polish stocks have lagged so far in 2013, and the one-year total return is only 4.4 percent. But its stock market has jumped 10 percent in the past month, the best performer among major stock indexes.
Turkey’s Istanbul Stock Exchange National 100 Index has been a barnstormer, up 211.4 percent since March 2009, beating the heady U.S. benchmark S&P 500. But there could be plenty of additional upside yet to come, considering Turkey’s attractive valuation. Turkish stocks yield 2.95 percent, and are priced at only 10.5 times 2012 profit and just 9.5 times next year’s — one of the cheapest valuations in Europe.
With U.S. stock indexes at record highs, you could combine European value and growth stocks for a surge not seen in a decade.
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