Recent economic data here in the U.S. has certainly been less than encouraging. Consumer confidence has tumbled, job growth remains anemic, and stocks still haven't reversed their recent downward trend. But no matter how bad things are here at home, we could still comfort ourselves with the knowledge that at least we're not Europe. But while the European continent has been battered quite soundly, signs are beginning to appear that the worst may be over, at least in investors' minds.
Euro-kay
The latest Bank of America Merrill Lynch monthly fund manager survey found that worries over the future of the euro and European stocks appear to have abated. The net number of global managers underweighting euro-zone stocks fell to 27% from 34% in May. Additionally, the proportion of managers who think Europe has the weakest outlook for global profits fell from 41% last month to 33% in June.
Furthermore, recent news that European banks requested a smaller-than-expected volume of loans from the European Central Bank cast positive light on the region's banking system and suggests that it may not be as troubled as previously thought. Likewise, business and consumer confidence in the eurozone stayed relatively steady in June, indicating that concerns over a recessionary relapse are easing.
Of course, it wouldn't take much to get the cycle of worry spinning again, but I do think much of the potential downside for Europe has already been priced into the market. I still believe that Europe has some meaningful structural challenges ahead of it and that growth is likely to be subpar in the coming quarters, both relative to its long-term potential and relative to much of the rest of the globe. However, it is very possible that the euro and European stocks in general have been oversold a bit and may stage a slight rebound in the immediate future.
Follow the money
So does this mean it's safe to go back into the European waters? Well, hopefully you never completely left them in the first place. As I've highlighted before, Europe is too big a player in the global world for investors to completely ignore and folks shouldn't cut back on their exposure here. However, I would still recommend caution in allocating new money to the area.
The fact of the matter is, global opportunities are likely to be greater elsewhere, especially in emerging markets. Recent concerns over a potential slowdown in China's growth aside, emerging markets are hands-on favorites to take first place in the global growth race over the next decade. Volatility is the name of the game when it comes to developing nations, however, so make sure you take a diversified approach here. Consider picking up an inexpensive exchange-traded fund like Vanguard Emerging Markets Stock ETF
If you're looking for the chance to outpace the market rather than just track it, Matthews Pacific Tiger (MAPTX) is an excellent choice. This actively managed Asia-Pacific fund looks for fast-growing names across the market cap spectrum in developing nations. Big-name players like China Mobile
Outlier of success
But just because the European continent may be in for a long, slow haul doesn't mean that there aren't pockets of opportunity out there. If you're an individual stock picker, you can still benefit from the recent decline in European stock by picking up individual names that may be in better financial condition. In this case, I might think about looking at German-based companies. Germany has been one of the strongest performers in the eurozone and its economy is much healthier than almost any of its peers. Growth estimates for the nation were recently upgraded to around 2% for 2010, while growth estimates for most of the rest of Europe are trending in the opposite direction.
In this space, investors might want to consider some tech names that are likely to benefit from a rebounding German economy. Two good candidates are software company SAP
Ultimately, while the worst may be behind Europe, it hasn't fully extricated itself from its financial crisis just yet. I continue to recommend that investors maintain their current investment in this region, but exercise caution when committing new money to the area.
