Barron’s most recent cover story exclaimed, “Europe Will Bounce Back.” Believers argue that euro-zone factory output increased for the first time in well over year. Meanwhile, the European Commission’s economic morale index rose to its highest since May of 2012. What’s more, Spain’s unemployment rate actually fell for the first time in two years. Who would have believed that?
Do the modest signs of improvement warrant a stock allocation to one or more of the 17 member countries in the European Monetary Union? Momentum indicators suggest that you should consider it. However, I am not intrigued by a recent boom in equities tied to the monetary union nor the “improving” data. For example, Spain’s unexpected drop in unemployment is entirely seasonal, tied to the wave of tourism that occurs at this time of year. Moreover, the potential for a sovereign bond flare-up in Italy, Portugal, Greece or Spain is still exceedingly high; the unworkable debt burdens that each faces continue to move higher into the realm of the absurd. (Note: Each of these countries will end 2013 in a debt-to-GDP range of 125%-175%.)
On the other hand, iShares MSCI United Kingdom (EWU) may be a developed European investment worthy of consideration. Here are 3 reasons why a moderate dollar amount may provide reasonable reward for the risk:
1. They’re A Whole Lot Like Us. For the first time since 2011, the United Kingdom can boast (and I use the word “boast” squeamishly) back-to-back quarterly increases in its economic output; GDP rose 0.6% in the 2nd quarter after rising a mere 0.3% in Q1. Give credit to the UK consumer. Annual disposable income may be increasing in a country where the consumer accounts for nearly two-thirds of the economy. Housing is also gathering strength, as mortgage approvals recently logged a 17-month high. In other words, ultra-low interest rate policy coupled with central bank bond purchasing has boosted borrowing in a consumption-based society. And we have all come to realize just how much an equity market loves the stimulus game.