Content provided by Kostya Etus – Research/Portfolio Analyst 

110514_Europe tour map blog image

I recently took a tour of Europe with my wife. We started in London, then traveled to Paris, Lucerne, Venice, Florence, and finally Rome. Two significant observations became very apparent to me:

  1. Every city was very different when compared to the others (as well as to the U.S.), and I’m not just talking about the language—different architecture, infrastructure, clothing, cars, attitudes, and different prices!
  2. Judging by prices and the amount of people shopping, you would never guess Europe is having economic issues.

The key takeaway was that although most of the countries are part of the Eurozone, the use of the euro as currency is about the only thing connecting them. This makes it harder to evaluate the region from an investment standpoint. Nonetheless, let’s look at it from a few different perspectives:

  • Economic: Although some of the Eurozone economies have been weakening, the majority of the countries (as well as in aggregate) are still in expansionary territory from a Purchasing Managers’ Index (PMI) and Composite of Leading Indicators (CLI) standpoint.
  • Valuations: Europe is undervalued, especially when compared to the U.S.
  • Sentiment: While sentiment in the U.S. is still somewhat high, sentiment for European markets is at some of the lowest levels in years (a bullish indicator).

Lastly, let’s not forget the talented Mr. Draghi who is trying to utilize the European Centralized Bank to its full power with some “shock-and-awe” tactics following in the footsteps of the U.S., UK, and Japanese recoveries. But he is not only boosting liquidity through bond purchases, he is also enticing banks to stop hoarding cash. All of these reasons make Europe appealing and help explain CLS’s positions.

Now, go visit Europe and support their economy! I certainly did… that’s why I’ve been eating ramen for lunch every day since.

 

 

 

 

2031-CLS-10/24/2014

 

The Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. The Composite of Leading Indicators (CLI) is an index published monthly by the Conference Board used to predict the direction of the economy’s movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy.
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