While we are forecasting a high, single-digit gain for the S&P 500 index over the course of 2014 at this time, we do still contend that U.S. stock market returns will likely be outpaced in 2014 by certain International – Developed Country stock market returns (notably Europe) as regions such as the Eurozone continue to emerge from their own recession.
Europe
The Eurozone (European Union Member States that DO use the Euro as their common currency)
1. Austria
2. Belgium
3. Cyprus
4. Estonia
5. Finland
6. France
7. Germany
8. Greece
9. Ireland
10. Italy
11. Latvia
12. Luxembourg
13. Malta
14. Netherlands
15. Portugal
16. Slovakia
17. Slovenia
18. Spain
Other European Union Member States that DO NOT use the Euro as their common currency
1. Bulgaria
2. Croatia
3. Czech Republic
4. Denmark
5. Hungary
6. Lithuania
7. Poland
8. Romania
9. Sweden
10. United Kingdom
Europe, in particular, looks compelling to us given the following:
- Their stock valuations look attractive both on a historical basis and, relative to U.S. stocks
- The region’s economy is gradually improving
- The European Central Bank (ECB) continues to promote growth through its own accommodative monetary policies
With respect to the last bullet point, the ECB cut short-term interest rates in November 2013 to just 0.25% and we believe that they will continue to keep rates low in an effort to help stimulate further growth in the Eurozone and stave off the risk of deflation in the region.
So far, this accommodative stance exhibited by the ECB has been working as the Eurozone economy grew by a quarterly 0.3% in the 4th quarter of 2013, up from a quarterly growth rate of 0.1% in the third quarter of 2013. Further, according to a recent monthly survey of economic conditions by Markit as cited in the CBS MarketWatch article entitled, “Eurozone recovery gathering speed”, while Germany continues to be in the driver’s seat of overall growth within the Eurozone, the recovery is now spreading not only to France but also to economies in debt-laden countries such as Greece and Spain.
Many expect 2014 to show even more signs of continued progress in terms of economic growth across Europe. According to an article in The Irish Times entitled, “Merkel upbeat on euro zone growth potential in 2014”, the European Commission has forecasted annual growth of 1.2% for the Eurozone in 2014 and 1.5% for the more encompassing European Union.
The overall, coordinated economic recovery process in Europe is reminiscent of the early stages of the U.S.'s own quantitative easing program and therefore we would expect to see an inflow of overall investment to the region. A March 21, 2014 Markets Media article entitled, “Investors Increase Europe Equity Exposure” indicated that fund managers believe investors are increasing their allocations to European equities as emerging market volatility has increased and U.S. equities have become more expensive. Underlying fund flow data supports the increased attraction to international equity strategies by both fund sponsors and investors. According to the Investment Company Institute (ICI), as of the end of January 2014, the number of Global/International Equity Exchange-Traded Funds (ETFs) outstanding increased by 11% on a year-over-year basis while the assets in these ETFs increased by greater than 7% over this same time period.
Risks to the downside still exist as certain European equities could become less attractive if the Euro significantly increases in value or if geopolitical tensions escalate in neighboring emerging market countries creating additional market volatility. For these reasons, international equities, particularly in Europe, with a long track record of relatively high dividend distributions are worthy of consideration from our perspective to help provide for total return potential within an area that we believe is a land of opportunity in 2014.
Disclosure:Hennion & Walsh Asset Management currently has allocations within its managed money program consistent with the investment theme discussed in this article. This article is for educational purposes only and should not be considered as a solicitation to purchase or sell any of the securities mentioned. As a reminder, past performance is not an indication of future results.
© Hennion & Walsh
