It's Time to Buy Europe

The coordinated central bank intervention that we've seen from the European Central Bank, the Federal Reserve, and most recently the Bank of Japan demonstrate just how serious policymakers are about getting the global economy back on a stronger footing. Investors have taken note of that determination, and in the U.S., the stock market has set successive five-year highs. Some now believe that the next leg higher will make a serious run toward all-time highs in the not too distant future.

Among professional money managers, though, the mood isn't nearly as euphoric. In fact, manager sentiment suggests that stocks in the U.S. may have come as far as they can, and many managers are looking elsewhere for better bargains from equities.

Running out of steam
With the Dow having risen 11% since the beginning of the year and broader market indexes posting even stronger gains, investors who braved the tough economic conditions from early 2012 have been rewarded for their courage. Those rewards, however, may be coming to an end. In a survey of top fund managers, 58% of those responding said that U.S. stocks were the most overvalued market in the world.

Obviously, the big jump in the stock market is a major part of the negative sentiment on U.S. valuations. Yet another thing that managers are worried about is the risk side of the equation, especially the potential impact from the fiscal cliff. With no action likely until after the election and the possibility of dozens of lame-duck lawmakers having little or no incentive to move decisively on resolving the huge changes that are due to take effect to the tax code at the beginning of 2013, the mounting uncertainty could result in at least a pause to the bull market, if not a longer-term reversal.

Manager sentiment matches up pretty well with how many ordinary investors feel about the stock market right now. After big gains, it seems that stock prices have a built-in assumption that all the efforts toward boosting the U.S. economy will succeed, even before that economic success comes to pass. So if the expected good news actually happens, then it shouldn't give investors anything more than they already believed would happen, thus making further advances uncertain. Yet if bad things happen, look out below.

Sailing toward the sunrise
If U.S. stocks are overvalued, the obvious question is where fund managers believe you can get better bargains. The answer is Europe, where fears over the sovereign debt crisis have greatly diminished in light of the European Central Bank's efforts. The survey showed that 43% of managers believe that Europe is the most undervalued stock market right now. With a constitutional court in Germany having approved the validity of the European Stability Mechanism bailout fund, confidence is high that Europe has the tools it needs to get itself out of its mess.

Already, stocks have seen big gains on that assumption. On the financial front, Banco Santander (NYSE: SAN  ) has vaulted around 60% just since late July, while compatriot Banco Bilbao (NYSE: BBVA  ) has also seen similarly sized gains in light of better prospects and lower Spanish bond rates. You'll also find that optimism expressed in gains for mobile giant Telefonica (NYSE: TEF  ) , which has broad exposure to markets not just in Europe but in Latin America as well.

Fund managers have moved to a big overweight position on Europe, but they don't trust the recovery in the financial sector. Instead, they've turned to oil and gas stocks as a favorite sector. Despite the recent drop in oil prices, France's Total (NYSE: TOT  ) and Norwegian giant Statoil (NYSE: STO  ) both benefit from higher prices for Brent crude compared to U.S.-produced West Texas Intermediate. Moreover, with plenty of new exploration opportunities, both companies have continued building their resource bases and are poised for future growth. Although their shares have rallied along with the rest of Europe, they still boast reasonable valuations as well.

Watch your balance
In light of the survey, looking at your relative allocations to U.S. and European stocks is a smart move right now. But rather than making extreme changes to your portfolio, a better long-term strategy is to come up with ranges of how much of your stock portfolio you want to dedicate to various parts of the world. That way, you'll get into the habit of buying into beaten-down markets when they're recovering while taking profits on expensive investments.

Just because the U.S. market may be overvalued in general doesn't mean that you can't find good investment opportunities among individual stocks. Read this popular Motley Fool special report and find out the names of three American companies set to dominate the world. It's absolutely free, so don't wait -- click here and claim your copy today.

Fool contributor Dan Caplinger wants to send himself across the ocean one of these days. You can follow him on Twitter @DanCaplinger. He doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Total and Statoil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is a world traveler.


Read/Post Comments (13) | Recommend This Article (14)

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  • Report this Comment On September 20, 2012, at 11:25 AM, Mega wrote:

    "Fund managers have moved to a big overweight position on Europe"

    I'd like to see a source for that claim.

  • Report this Comment On September 20, 2012, at 12:24 PM, tokelau wrote:

    How can you seriously think that the efforts of the ECB will solve the euro-crisis? Of course they won't. The only thing the ECB can do is fight some of the symptoms, they can never, ever cure the disease. That's why right now the euro is heading south again. You Americans keep thinking of the ECB as a sort of FED. Well, it isn't, it doesn't even come close. As a European, I'm not impressed by your analysis, to say the least.

  • Report this Comment On September 20, 2012, at 12:44 PM, fool3090 wrote:

    Europe scares me and, since I don't live there and only visited once, I lack the confidence to buy individual shares. Buy what you know, right?

    That said, one needs foreign exposure. But what? I take the ETF approach. But I don't try to play individual countries. I just get the Vanguard VEA Fund. It's a mix of 1,100 mega/large caps in 21 EFEA countries (Europe, Far East, Austral Asia). You basically get the biggest firms that are not based in the U.S.

    It might be simplistic, but I have a hard time following domestic markets let alone the goings-on across two oceans. VEA works for me. It might not for you. My 2 cents. (Long on VEA in both trading account and IRAs)

  • Report this Comment On September 20, 2012, at 4:48 PM, TMFGalagan wrote:
  • Report this Comment On September 20, 2012, at 4:54 PM, TMFGalagan wrote:

    Also, from here: http://buzz.money.cnn.com/2012/09/19/fund-managers-stock-ral...

    Quoting: "fund managers have increased their position in European equities by double digits for three consecutive months. That marks the first time they've moved that aggressively into European stocks since the summer of 2009."

    best,

    dan (TMF Galagan)

  • Report this Comment On September 20, 2012, at 6:24 PM, frogburger wrote:

    This is insane. From what I'm hearing from my French family and friends, the situation is getting worse there. No jobs, massive deficits, etc...

  • Report this Comment On September 20, 2012, at 6:31 PM, xetn wrote:

    What do you think will happen to the share price of SAN when (or if) Spain defaults and leave the EU?

  • Report this Comment On September 20, 2012, at 6:56 PM, Mega wrote:

    "A net 1 percent of global asset allocators are overweight the region compared with a net 12 percent underweight in August."

    1% overweight isn't what I would call a big position.

  • Report this Comment On September 21, 2012, at 12:14 AM, 2motley4words wrote:

    @MegaShort: Although a net 1% overweight isn't a big position per se, IMHO a 13% swing since last month is definitely quite dramatic.

  • Report this Comment On September 21, 2012, at 1:15 AM, portefeuille wrote:

    "net 1 percent of global asset allocators are overweight"

    That 1% is a balance value, like the ones used in the ifo survey results.

    --------------

    The Ifo Business Climate Index is based on ca. 7,000 monthly survey responses from firms in manufacturing, construction, wholesaling and retailing. The firms are asked to give their assessments of the current business situation and their expectations for the next six months. They can characterise their situation as “good”, “satisfactory” or “poor” and their business expectations for the next six months as “more favourable”, “unchanged” or “more unfavourable”. The balance value of the current business situation is the difference between the percentages of the responses “good” and “poor”, the balance value of the expectations is the difference between the percentages of the responses “more favourable” and “more unfavourable”.

    --------------

    from here -> http://www.cesifo-group.de/ifoHome/facts/Survey-Results/Busi...

    Thus if a% of investors are "overweight Europe", b% are "equal weight" and c% are "underweight" the statement "net 1% are overweight Europe" means that a - c is equal to around 1.

  • Report this Comment On September 21, 2012, at 3:08 AM, JadedFoolalex wrote:

    Frogburger,

    your family will unfortuneatly continue to see huge deficits and no work as long as the Socialists are in power. Increasing taxes and spending billions more is not a recipe for prosperity!

  • Report this Comment On September 21, 2012, at 7:27 AM, TMFGalagan wrote:

    @xetn - Perhaps that risk is why managers are looking more at oil and gas stocks than at the financials.

    best,

    dan (TMF Galagan)

  • Report this Comment On September 23, 2012, at 1:19 PM, bornboring wrote:

    I just returned from a visit to Spain, Northern part including Santander, Bilbao and Basque country.

    What did I see? The streets of Madrid, Barcelona as well as the smaller provincial cities were not short of shoppers. Casually dressed people exited high-end shops with shopping bags. There were more H & M than Starbucks and MacDonalds combined, not to say Zara their own brand. Shopping activity was at least double that of my home town in the middle of N America. Where is the recession everybody talked about? On Sept 11, I was in Barcelona observing the Catalonya ¨national¨ Day demonstration. I don´t know how N A papers reported, but it was fun. I noted 2 kinds of flags people were wrapping themselves in, the yellow and the blue. Those with blue triangle represents those for independence. There was this family where the parents showed yellow while their kids chose blue. I jokingly asked the kids if they actually meant they wanted independence from their parents. They could not understand English.

    With some help from some locals here lies the truth: the Spanish economy boomed because of foreign buyers in real estate, and everyone went to work for construction, especially those in the villages where only Spanish is spoken. When the foreign buyers suddenly retreat to save their own skin back home, these construction workers could not find another job locally. They cannot travel to Northern Europe for another job, because of language & skills. The smaller banks were left to hold the bag and went bankrupt eventually drawing the government into it. Actually the industrial belt between Bilbao and Barcelona is still doing fine.

    The story here is reminiscent of Quebec where a political repression on language caused economic recession. A few decade ago in US, there was this persuasion for all blacks to speak in a certain lingo. I don´t see it advanced the economical status of blacks an iota.

    The real tragedy is that a lot of politicians do not understand economics. They worsen the situation even if they did not intend to profit from it.

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