{"id":32578,"date":"2012-09-26T10:27:12","date_gmt":"2012-09-26T14:27:12","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/09\/europe-will-be-the-best-performing-market-for-the-rest-of-2012\/"},"modified":"2012-09-26T10:27:12","modified_gmt":"2012-09-26T14:27:12","slug":"europe-will-be-the-best-performing-market-for-the-rest-of-2012","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/09\/26\/europe-will-be-the-best-performing-market-for-the-rest-of-2012\/","title":{"rendered":"Europe Will Be the Best-Performing Market for the Rest of 2012"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

September 18, 2012 was a noteworthy day for students of history.<\/p>\n

King Juan Carlos of Spain stepped into the political fray for the first time in more than 30 years, calling on all Spaniards to stick together during the hard times in front of them and to avoid chasing unrealistic pipedreams (those who can read Spanish can view his letter here<\/a>).<\/p>\n

\"\"<\/a><\/p>\n

Advising Spaniards not to tilt at windmills since 1975.<\/p>\n<\/div>\n

The King\u2019s comments were his most direct involvement in Spanish politics since he intervened in 1981 to prevent a mad, machine-gun-toting colonel from taking over the government.<\/p>\n

Today, no one is walking into Spain\u2019s parliament building and spraying the ceiling with bullets, but the King\u2019s letter is telling.\u00a0 Spain\u2014and much of the rest of peripheral Europe\u2014is mired in a cycle of debt-necessitated austerity and economic contraction that has created the worst crisis in decades. \u00a0Europe is a mess.<\/p>\n

For all of the optimism surrounding Mario Draghi\u2019s \u201cBig Bazooka<\/a>\u201d moves to stabilize the Eurozone through outright monetary transactions, the crisis still has a long way to go before it is resolved.<\/p>\n

And I should be clear\u2014it may never get resolved.<\/em><\/p>\n

Depending on the political decisions made over the next 3 \u2013 6 months, the Eurozone could emerge from the crisis as a stronger, more durable union.\u00a0 Or, the entire European project\u2014which has been in the works for sixty years now\u2014could come apart at the seams.<\/p>\n

With all of this as an intro, you might be surprised by what I say next: I\u2019m bullish on European equities and maintain an overweight position in them in most of my client portfolios.<\/strong><\/p>\n

Let\u2019s look at some of the bullish arguments:<\/p>\n

    \n
  1. The ECB doing \u201cwhatever it takes\u201d via unprecedented monetary stimulus \u00a0<\/strong>\u2013 All investors have heard the standard advice: Don\u2019t fight the Fed<\/em>.\u00a0 \u00a0I would argue that, for the first time, the same can be said of the European Central Bank.\u00a0 Mario Draghi broke long-standing taboos and asserted his authority over the German Bundesbank by launching his program of potentially unlimited outright monetary transactions over the objection of Bundesbank President Jens Weidmann<\/a>.\u00a0 Draghi has a bigger bankroll than you, and he\u2019s shown that he\u2019s not afraid to use it, even if it means stretching his constitutional mandate.\u00a0 This does not by any means suggest that Draghi can create the conditions for a durable bull market; but it does mean that he can stoke the flames of a multi-month rally.<\/li>\n
  2. The bailout mechanisms will clear up the uncertainty weighing on the market <\/strong>\u2013 Spain has yet to formally request aid from the ECB or the bailout institutions; yet rumors that prime minster Mariano Rajoy was getting close to doing so was enough to send Spanish stock prices soaring last week.\u00a0 According to leaked news from the parties involved, EU and Spanish officials are working behind the scenes to set out the conditions for a Spanish bailout that Rajoy would accept.\u00a0 Meanwhile, Der Spiegel reports<\/a> that talks are underway to allow the Eurozone\u2019s primary bailout fund\u2014the European Stability Mechanism\u2014to be leveraged to 2 trillion Euros if need be.\u00a0 Suffice it to say, a lot<\/em> of monetary firepower is being thrown at the Eurozone, and a fair bit of it can be expected to find its way into the Eurozone equity markets.<\/li>\n
  3. European stocks are the cheapest in the world <\/strong>\u2013 Finally\u2014and most importantly\u2014European stocks are dirt cheap relative to their world peers.\u00a0 To be sure, some sort of \u201cEurope discount\u201d is appropriate given the macro risk and the unappealing growth prospects for years to come.\u00a0 But at some point, the stocks are simply too cheap to ignore.\u00a0\u00a0 By FT estimates<\/a><\/em>, the French, German and Spanish markets trade for just 14.1, 12.7, and 13.4 times earnings, respectively.\u00a0 Depressed <\/em>earnings, I might add.\u00a0 Each also yields between 3 and 5 percent in dividends.\u00a0 Compare this to the United States,\u00a0 which trades for 16.1 times cyclically-high earnings and yields a pitiful 2.1%.\u00a0 Are European stocks as attractively priced as they were two months ago?\u00a0 Of course not.\u00a0 But I still expect them to be among the best performing in the world over the next 6-12 months.<\/li>\n<\/ol>\n

    It\u2019s only fair to mention the other side of the coin.\u00a0 If the bond market loses faith in Mr. Draghi or infighting among Europe\u2019s politicians prevent them from making the institutional reforms needed to make the bailouts credible, then all bets are off. \u00a0(Just today it was announced that the German, Finnish and Dutch finance ministers had announced opposition to aspects of the bank bailout….sigh). In the event that the reforms truly break down, investors will want to not only exit their European equity positions but exit all <\/em>risky assets, as this would mean a return to the risk-on \/ risk-off volatility we\u2019ve had to endure for much of the past two years.<\/p>\n

    SUBSCRIBE <\/a><\/strong>to Sizemore Insights<\/em>\u00a0via e-mail today.<\/p>\n

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