Edward Gray, co-manager of the Delaware International Value Equity Fund, says that despite the region's woes, many blue-chip firms with headquarters on the Continent sell a lion's share of their goods to non-European markets. The French drugmaker Sanofi, for example, generates only 30% of its sales in Europe, with the rest coming from the U.S. and the developing world.
Think companies, not countries
Zeroing in on such opportunities rather than fretting over Europe's no-growth economy is the key to profits in the region. In fact, history shows there's no real relationship between an economy's growth and its stock gains.
"It comes down to the health of individual businesses, not the countries where they're based," says Simon Hallett, chief investment officer for the global asset manager Harding Loevner.
On that front, European firms are actually in decent shape, with projected annual earnings growth of around 8% over the next three years. While that's lower than the 11% gains expected for U.S. companies, European businesses have less debt than their American counterparts and are trading at far more attractive valuations than the rest of the world.
Historically, the price/earnings ratio for the MSCI Europe stock index has been 18% higher than the P/E for the S&P 500 (based on 12-month trailing profits). Today, however, European equities are trading at an 18% discount.
Buy industry leaders at a discount. "Because of macro fears, good and bad companies are all selling off," says Lei Wang, co-manager of the Thornburg International Value Fund. This has allowed the fund to pick up high-quality European multinationals on the cheap -- many are financially strong companies that dominate their industries but had been too pricey to touch.
Among the stocks Thornburg International Value recently added: Adidas (), the world's second-largest athletic shoe maker, which saw its P/E fall from nearly 18 to less than 14 last year, and Volkswagen ( ), the global automaker whose P/E is under 4. The fund also bought Vallourec ( ), the French steelmaker whose P/E was cut in half last year to around 11.
Favor strong dividend payers. The MSCI Europe index sports a dividend yield of more than 5%, vs. the S&P 500's 2.1% payout. And the Leuthold Group found that if you're looking for high-dividend-paying stocks with stable payouts, half of those investments will be found in the European market.
Be careful, though. Many global dividend index funds weight their holdings by yields. This means risky stocks whose yields are rising solely because share prices are sinking could make their way into these funds. An exception: Wisdom-Tree DEFA (), which weights its holdings by the total dollar value of dividends paid. This distinction tilts the fund to larger stocks across a broader array of sectors.
Evolve with the emerging markets
It's easy to assume the emerging-market bull is over. Central banks in the developing world slammed the brakes on their economies last year to slow inflation, while a real estate bubble is forming in China.
But Brazil, Indonesia, and Turkey have already begun to take their foot off the brakes by cutting interest rates. And don't expect a U.S.-type housing collapse in China, despite clear overbuilding. Real estate development in the People's Republic wasn't financed on anywhere near the amount of leverage that led to the U.S. housing crisis, says James Swanson, chief investment strategist for MFS.
Bet on consumer companies. For years, the classic emerging-market play has been to buy shares of low-cost manufacturers, in places like China and India, that cater to insatiable Western consumers.
As labor costs in those countries have risen -- and now that the West is tapped out -- the tables have turned. Today the best growth is found in companies that cater to the developing world's burgeoning middle class. Since the start of 2010, emerging-market consumer stocks have climbed more than 21% while the rest of the developing world's shares are down.
Yet if you just own a broad emerging-market fund, only 15% of your holdings are likely to be in those firms. A better bet: Shift 25% of that emerging-market stake into an ETF like EGShares Emerging Markets Consumer (), which invests in 30 consumer goods or services companies in the developing world. You will end up with slightly more than a third of your emerging-market money tied to the consumer.
Be the tortoise, not the hare. Don't count on a repeat of the 17% average annualized gains that emerging markets generated between 1999 and 2007. That surge largely had to do with the fact that P/E ratios for these stocks had sunk to a record low of two in 1998, in the wake of the Asian currency crisis.
After last year's selloff, emerging-market stocks are now sporting a P/E of 10 -- that is, they're back to being slightly cheap, but not the super cheap needed to produce double-digit annual gains.
That's all right, though. In the 15 years since the "Asian contagion" turned investors away from foreign investing, the approach has changed. No longer are foreign stocks short-term opportunities to run into and out of as performance shifts. They are now core holdings. Forget eye-popping short-term gains; what you need are solid returns over time.
MONEY magazine is researching an article on ways to reduce the financial pain of college. We're looking for families that can talk about new and creative ways that they're raising cash for college and cutting costs while they're there. Sound like you? Tell us your story and you might even get your picture in the magazine! E-mail Beth_Braverman@moneymail.com.
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