Why U.S. Investors Are Turning to Europe

The New York-listed iShares Europe 350 ETF has more than doubled in size in the past six months; the front page of last Friday’s Financial Times reported that U.S. purchases of European equities have surged, while the Wall Street Journal noted yesterday that “Europe is back.”

European equities have underperformed U.S. equities by around 45% since the financial crisis. Despite having a good year in  2013, the S&P Europe 350 remains well below its pre-crisis levels; the S&P 500 spent much of late 2013 recording new highs.  So why would U.S. investors take an interest in European stocks?

One explanation is that while the Euro crisis of 2012 discouraged transatlantic investment, with better economic news it is natural to expect some returning investment from U.S. asset allocators. But valuations may also be playing an important role.

The comparatively small rise in European stock prices since 2009 has resulted  in much more attractive valuation levels than in the U.S., both at the security and Index level.  Dividend yield provides one example:

European equities look attractive on a risk-free rate comparison, too.  While the dividend yield for the S&P Europe 350 is well above the German 10 year rate of 1.6%, the dividend yield for the S&P 500 is below the current 10 year UST yield of 2.6%.