Investment across the pond has become interesting all over again. With the Euro zone finally being saved from being broke and ‘Grexit' being averted by an eleventh-hour debt deal, month-long anxieties over the fate of euro are running low. This has helped the European stock markets, which were in red for the last one month, to settle down.
Investors who turned away from Europe last month now can consider entering this space to cash in on the European Central Bank's (ECB) ongoing QE program, a fragile euro and rebounding fundamentals. Goldman Sachs is also supportive of this view and recently upgraded its outlook on European stocks to “Overweight” from “Neutral.”
The STOXX Europe 600 has jumped about 10% in the last two weeks, as the gridlock between Greece and its international lenders eased.
Goldman: Dump U.S. & Stack European Stocks
Along with upgrading the European stocks, the investment bank downgraded the U.S. stocks. This was due to diverging monetary policies in both continents. While the Fed is preparing for an interest rate lift-off, the ECB is applying an ultra-loose monetary tool. The investment forecast is that by the end of 2015, European stocks should outperform our domestic equities.
In any case, the 19-member Euro zone economy had a strong start to 2015 on the back of the stimulus measure. The economy grew 0.4% in the first quarter and outshined the 0.2% growth for the U.S. in the same period. The first quarter represented the highest quarterly Euro zone growth in nearly two years. Moreover, the inflationary scenario is looking better despite lower global oil prices.
Success of QE
Previously, QE had proven extremely beneficial for the U.S. and Japanese markets. During the QE era, the key U.S. benchmark S&P 500 skyrocketed about 120%. Another example is the Japan model which basically bears a resemblance to the Euro zone issues, i.e. a long deflationary streak and weak growth. Japan's key benchmark Nikkei index soared about 70% since the initiation of QE. On the other hand, Stoxx Europe 600 index has returned investors just 5.7% so far, promising more room for future growth.
Interesting Valuation
This clearly explains the reason behind our optimism over the European stocks. Moreover, after a month-long sell-off, all these equities and related ETFs are trading at a low valuation giving another reason for value investors to play. WisdomTree Europe Hedged Equity Index Fund (HEDJ) is presently trading at 17 times P/E (ttm) compared with 18 times offered by the ultra-popular U.S. ETF SPY (read: Great ETF Picks for 2nd Half of 2015).
