The world officially entered a bear market last week, as the MSCI All-Country World stock index fell more than 20% below its May 2 high. The recent damage in Europe itself has been worse, even in the strongest countries. Since its peak in early July, the DAX index of German blue chips has fallen more than 30%.
As a result, investors can start getting ready for some bargain hunting. European stocks probably haven’t hit bottom yet. But when they do, the best deals may not be available for long.
You might think it smart to postpone buying anything until a big selloff occurs. That makes sense if you’re willing to risk missing the best opportunities. The fact is, no one can predict how the dual threats of global recession and a Eurozone crackup are going to play out, although I’ve outlined some likely possibilities in recent columns.
So a safer strategy is to start following depressed European blue chips – and when they seem like compelling values, go ahead and buy them. Don’t worry about where the exact bottom is. If you think you’re getting a good deal now, it will look even better in a few years when the global economy has improved.
The current European stock decline chiefly reflects the troubles of the Euro currency. But you can imagine circumstances under which stock markets in the strongest European countries would rebound fairly quickly. Germany and the Netherlands will have to shore up banks if Greece defaults, but they might be able to demand a limit to their responsibility for future Eurozone bailouts. Or perhaps Greece could leave the Eurozone with far less turmoil than people now fear.
So there’s a possibility of missing out on today’s European bargains if you wait too long. It may be smarter to look for stocks with limited risk that could easily ride out a further decline and invest before any crisis. Here are three criteria to consider when looking for timely European stocks:
- Focus on the biggest, strongest companies that are listed on the New York Stock Exchange or Nasdaq. Those shares will be easy to buy and sell.
- Favor stocks in the countries that would emerge the strongest from a Eurozone breakup, whether those countries use the Euro themselves or not. This means Germany and the Netherlands first, then Switzerland and the U.K.
- Look for yields above 3%. There’s still the possibility that European markets will decline further, and shares with above-average yields will hold up better.
The simplest choices are exchange-traded or closed-end funds that hold stocks meeting these three criteria. Among closed-ends, the obvious choice is the New Germany fund (GF). There are also ETFs offered by iShares for most European countries, including Germany (EWG) and the Netherlands (EWN).
If you prefer to buy shares in individual companies, the likely candidates fall into categories similar to those of high-yielding U.S. stocks. Among them: Oil giants such as BP (BP, 4.7% yield) and Royal Dutch Shell (RDS-A, 5.5%); drug stocks such as AstraZeneca (AZN, 4%) and GlaxoSmithKline (GSK, 5.2%); telecom Vodafone Group (VOD, 7.8%); and British gas utility National Grid (NGG, 7.8%).
One thing to be aware of is that countries often collect small withholding taxes on dividends paid to foreigners. You may be able to recover this money when you file your taxes, but it’s confusing and a nuisance.
If you want to make just a single investment, I’d go with the iShares MSCI Germany Index Fund (EWG), which has a market cap of $2.7 billion and a yield of more than 3.2%. The portfolio is weighted toward large value stocks, and you avoid some of the complications of owning shares in individual foreign companies. Best of all, the fund’s broad diversification and above-average yield should give you some protection if European markets slide further before they finally hit bottom.