There's no denying that Europe is in a world of hurt right now. As the so-called PIIGS nations of Portugal, Ireland, Italy, Greece and Spain struggle to maintain their debt loads, investors continue to flee the region. Funds like the iShares MSCI European Monetary Union Index (NYSE:EZU) have seen their share prices fall by the wayside. Stocks in Germany and France saw declines of nearly 25% in the third quarter, while those in Italy fell by more than 33%. However, in all this carnage, forward-thinking investors could find some amazing deals. Following Warren Buffet's wisdom, by "being greedy when others are fearful," Europe currently offers a fertile ground for contrarian investors.
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Slowing growth, exploding public debts and austerity measures, continue to put pressure on the already fragile economic situation in Europe. It's no wonder why so many individuals have soured on the regions prospects. However, all may be not lost for the old world. The European Central Bank (ECB) along with the International Monetary Fund (IMF) have continued to go ahead with their nuclear options with dealing with the crisis.
Over the weekend, France and Germany have reached agreement to boost the eurozone's rescue fund to 2,000 billion euros as part of a "comprehensive plan" to resolve the sovereign debt crisis. The region's main bailout fund, the European Financial Stability Facility (EFSF), will be given additional powers enabling it to offer first-loss guarantees for bondholders. In addition, ECB officials have begun the process of restructuring Greek debt with bond private holders, taking a loss of 30 to 50% on their investments. Short-term government bond yields in Greece now exceed 90%. (For further reading, see How Countries Deal With Debt.)
The Old World is also seeing some love from an unlikely source: Emerging Markets. Asian investors, including the Chinese, represented a large percentage of the buyers of Portuguese bail-out bonds, during the first attempt at a restructuring fund. For the latest proposed package, finance ministers hope to create a special purpose vehicle to attract sovereign wealth funds from nations like Singapore and Qatar.
For investors, these steps, along with a variety of austerity measures, could be the final nail in Europe's debt woes. While there is still plenty of risk with regards to Europe, the continent is home to many of the world's largest multinational corporations. As the EU plods through this crisis, there will be plenty of strong surviving companies; ultimately, the best European equities will rise again. Now could be the best time to strike.
Being a Contrarian
Broad measures for European equities are trading at historically low metrics. The SPDR EURO STOXX 50 (NYSE:FEZ), which tracks Europe's 50 largest companies, can be had for a P/E of less than nine and nearly 5.49% dividend yield. Investors can use this ETF, or the iShares S&P Europe 350 Index (NYSE:IEV), as a broad way to play the region. However, there are plenty of other ways to play the region.
Greece remains the epicenter of Europe's financial woes. It's also the home to a global shipping market, with roughly 20% of the world's shipping fleet owned by Greek firms. As Asia and the developing world continues to hunger for natural resources over the long term, the Greek shippers will be hauling the goods across the pond. The duo of Navios Maritime Holdings (NYSE:NM) and Navios Maritime Partners L.P. (NYSE:NMM) offer interesting plays on the sector. Both trade near their 52 week lows, trade for cheap P/E's and yields in excess of 6 and 10%, respectively. Finally, with the potential of slow growth ahead, dividends could be the key to unlocking European portfolio growth. The First Trust STOXX Euro Select Dividend (NYSE:FDD) tracks 30 different strong European strong multinational dividend payers including drug maker AstraZeneca PLC (NYSE:AZN) and global bank Banco Santander (NYSE:STD); the ETF currently yields 5.86%. The small-cap dividend focused WisdomTree Europe Small Cap Dividend (NYSE:DFE) can also be used as a leveraged play on Europe's recovery. (For an additional reading regarding contrarian trading, check out Can Perpetual Contrarians Profit As Traders?)
The Bottom Line
Fortune favors the bold. With all the problems facing the EU, nothing could be bolder than adding European stocks to a portfolio. There is risk in Europe, but the potential rewards are equally as great. For investors, the previous picks along with the BLDRS Europe 100 ADR Index (NASDAQ:ADRU) make ideal selections.
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