OCEAN CITY — “Going global” has never been more important when it comes to investing. But in recent years, even as many investors have looked overseas for growth, one key area of the world has continued to cause turmoil in the markets.
Since 2010, Europe’s economic woes — from a banking meltdown in Cyprus to dispiriting unemployment figures out of Italy and Spain — have caused many to wonder if the eurozone can continue to hold together. But a wider crisis does not appear to have materialized, and now the continent is starting to show some genuine signs of resilience, according to BofA Merrill Lynch Global Research.
The fact is that Europe remains an integral part of the world economy. The 17 nations of the eurozone still account for nearly 14% of the world’s gross domestic product (GDP). If you include the 10 other European Union countries that have not adopted the euro, you have an economic powerhouse representing almost a fifth of global GDP, according to business-research association The Conference Board. And as this beleaguered continent begins to repair itself, new investment opportunities may already be emerging.
The European Union’s ties to the U.S. have always been close. They remain each other’s most important markets, generating some $5.3 trillion in commercial sales each year, according to a 2013 study by the Center for Transatlantic Relations. Eurozone banks, meanwhile, own more than $1 trillion in U.S. assets, and as of 2011 European-owned companies operating in the U.S. accounted for some 3.5 million jobs. And while China is the U.S. government’s largest creditor, Europe ranked a close third in November 2012, holding 20% of all U.S. Treasury securities — compared with 21.2% for China and 20.7% for Japan. While in recent years turmoil in Europe has added to volatility in the U.S. markets, a strengthening U.S. economy may very well help bring stability to Europe.
If you’re interested in gaining exposure to Europe but wary of risk, you might consider large European corporations with recognizable global brands in everything from cars to aircraft to consumer products. But precisely because of their relative stability, those stocks are already expensive. What’s more, a chief selling point for the multinationals now — their comparative lack of dependence on the European consumer — means they stand to gain less than other companies with the return of consumer confidence.
If you can handle slightly more risk, consider somewhat smaller companies in sectors — including construction, utilities and telecommunications — that sell directly to European markets.
One unexpected area of potential amid the continent’s financial woes is the banking sector — specifically, large European banks. The top seven European banks control 79% of the total market capitalization in this sector, and they remain attractively priced compared with major U.S. banks. There has been concern, however, about the lack of resolve to shut down bad banks, particularly in southern Europe.
Europe’s built-in disparities — between the strong countries and the weak ones, between optimism and pessimism — seem likely to continue to perplex analysts and strategists as they take stock of the continent’s near- and long-term outlooks. But the fact remains that the continent has too many built-in advantages to be ignored, and as it starts to show signs of recovery, potential opportunities could develop quickly.
Considering just how important Europe is to the U.S. and the rest of the global economy, that qualifies as good news.
(A Merrill Lynch Wealth Management Advisor who can be reached at 410-213-8520.)