According to Bank of America Merrill Lynch, money that’s been flowing out of U.S. equity funds since the beginning of the year appears to be re-emerging in Europe. Just as all markets experience periodic ups and downs, Europe appears to be in an upswing. In general, European equities boast reasonable valuations and some of the highest dividends in the world.2
Investors with an asset allocation strategy that takes into consideration their risk tolerance, investment timeline and financial goals can make investment changes within those guidelines. For example, small moves from U.S. equities to European stocks may open up performance opportunities without significantly changing one’s asset strategy.
If you’re interested in diversifying to capture more stocks abroad, mutual funds may offer a viable way to incorporate these securities. We will only provide investment advisory services after we have assessed your financial situation. If you’re interested in a comprehensive review of this nature, we’d be happy to schedule a time to discuss this with you further.
European stocks are presently attractive because the continent is further behind in the economic growth cycle than the U.S. While European equity markets have lagged in recent years, they now appear to offer greater potential relative to other markets as they play catch-up. Moreover, the euro-zone monetary policy looks to be supportive, and the region’s service sector is growing at the fastest rate since August 2007.3
Although sudden price peaks and drops based on political news are generally temporary, it is worth noting the influence. President Donald Trump’s recent announcement regarding new global tariffs on steel and aluminum, along with his threat to increase tariffs on the import of foreign cars, could have been expected to impact German stocks, particularly in the auto industry. Last year, 35 percent of the 17.25 million vehicles sold in the U.S. were imported. Losses resulting from lower exports and/or higher tariffs on vehicles produced by German car makers would be expected to result in a 10 percent drop in profits, which would typically impact share prices.4
However, Trump announced on March 22 that several allies, including the European Union, were exempt from the steel and aluminum tariffs.5
This news most likely came as a relief to the European Union -- as well as some U.S. manufacturers. The EU has expressed growing concerns about Trump’s protectionist stance on trade and has threatened punitive tariffs of its own on motorcycles, clothing, bourbon whiskey and a host of other products.6
Of course, EU countries have their own political problems that may influence domestic stock prices. For example, Italy’s recent election that created a balanced stalemate in parliament could have a negative impact on the European economy.7
1 Liz Ann Sonders, Jeffrey Kleintop and Brad Sorensen. Charles Scwab. “Navigating the Changing Market Environment.” Accessed April 4, 2018.
2 Blaise Robinson. Bloomberg. Feb. 23, 2018. “Equity Investors Fleeing Wall Street Are Turning to Europe.” Accessed March 9, 2018.
3 Dewi John. IPE.com. March 2018. “European Equities: Catching up with global growth.” Accessed March 9, 2018.
4 Neil Winton. Forbes. March 5, 2018. “Trump Auto Tariff Threat Slams VW, BMW Shares, But Experts Call It A Bluff.” Accessed March 9, 2018.
5 Jim Tankersley and Jack Ewing. The New York Times. March 22, 2018. “U.S. Exempts Allies From Steel and Aluminum Tariffs.” Accessed March 22, 2018.
6 Viktoria Dendrinou and Jonathan Stearns. Bloomberg. March 6, 2018 "EU Raises Stakes for Trump by Aiming Levies at GOP Heartland.” Accessed March 9, 2018.
7 Vickii Oliphant. Express. March 5, 2018. "Italian election 2018: What will Italy general election mean for Eurozone and euro?” Accessed March 22, 2018.
It’s often said that when one asset class falters, others are likely rising. To some extent, this may be occurring with U.S. equities. The stock market correction that started in February amid fears of rising inflation has continued through March with the threat of a global trade war.