While the United States debt downgrade certainly played a part in the recent market rout, the real culprit remains Europe's debt woes. Slowing growth, exploding public debts and austerity measures continue to put pressure on the already fragile economic situation there. Possible sovereign debt defaults from Portugal, Ireland, Italy, Greece and Spain are still a real threat plaguing the Eurozone. With that in mind, many investors have chosen to steer clear of the continent all together. However, accounting for more than a quarter of the world's market cap, investors shouldn't count Europe out completely. Long term bargains are beginning to emerge and skipping the continent completely ignores some of the planet's largest multinationals.

TUTORIAL: Bond Basics

A Back-Stop for Bonds
Investors may not want to give up on European stocks. They may even want to add the region to a portfolio, given the recent weakness. The latest bailout package for Greece includes the 109 billion euros it needs to cover its fiscal deficit as well as extend the maturities on Greek debt from the average 7 ½ years to between 15 and 30. The plan essentially provides a way for Greece to restructure its debt and takes one PIIGS concern off the table. In addition, The European Financial Stability Facility has started its own QE program to buy the bonds of other troubled nations and extend credit to Italy, Portugal and Spain. The ECB also began an Irish consolidation program which accepts debt instruments backed by the Irish government as collateral against ECB loans. (For more on QE, see Quantitative Easing: What's In A Name?)

Overall, European stocks have done pretty well this year, despite the debt problems. From the start of 2011 to the end of the second quarter, the broad-based the Vanguard MSCI Europe index (NYSE:VGK) has returned around 6%, beating the 4% return of the S&P 500. European stocks are cheaper too, with the MSCI Europe Index trading at just 11 times earnings. This is well below the historical P/E average of the low 20s. This is on top of European stocks trading below their historic price-to-book ratios. Finally, the VGK is still about 40% below its all time high reached in 2007, compared to about 10% for the S&P.

Finding This Value
About 23% of Europe's market cap lies within the financial sector or firms directly in the line of fire with regards to European sovereign debt and defaults. While Europe may not be completely out of the woods just yet, ignoring the region outright doesn't make sense. Pairing the iShares S&P Europe 350 Index (NYSE:IEV) and shorting iShares MSCI Europe Financials Index (Nasdaq:EUFN) could give a portfolio a net effect. However, there are ways to get more tactical with ones European exposure.

Poland offers investors a chance to participate in the future of Europe. The emerging nation has benefited from its strong consumer base and ties with Germany. In addition, Poland is not burdened by the euro currency and can adjust its monetary policies at will. Both the iShares MSCI Poland Index (Nasdaq:EPOL) and Market Vectors Poland ETF (Nasdaq:PLND) allow investors to tap into this dynamic nation.

The Currency Angle
Despite rising in recent months, the weak euro has benefited the region. Major exporting European nations such as Germany and the Netherlands have profited from the weaker currency. By focusing on these export-based economies, investors can tap into that growth. The iShares MSCI Netherlands (NYSE:EWN) and iShares MSCI Germany (NYSE:EWG) can provide access to this theme.

Finally, with the potential of slow growth ahead, dividends in Europe matter just as much as they do in the United States. Strong multinational dividend payers such as spirits maker Diageo (NYSE:DEO) or consumer products firm Unilever (NYSE:UL) could be exactly what a portfolio needs. The dividend focused WisdomTree Europe Small Cap Dividend (NYSE:DFE) can also be used as a leveraged play on Europe's recovery.

The Bottom Line
While the debt crisis in Europe continues play on, many investors are missing some of the real long term values within the European economy. The recent market rout has giving investors a chance to purchase some of these values at cheaper prices. Adding a dose of the stronger European countries or multinational firms could do a portfolio a world of good. (For related reading, see Formulating Monetary Policy.)

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