Europe Isn't a Winning Hand

Stocks & Bonds

Europe Isn't a Winning Hand

Your odds are better in emerging markets (and the U.S.).

Three years into a government debt crisis that regularly rattles world markets, Europe is more unsettled than ever. The good news is that the U.S. today is more resilient. And for investors looking for international exposure, emerging markets provide plenty of opportunity.

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In Europe, uncertainty—the enemy of investors everywhere—reigns. Elections in France and Greece have cast doubt on the working plan to bring the region back to fiscal health as voters rejected a strategy based on austerity and cutbacks in favor of one that includes more stimulative spending.

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The Dutch government essentially stepped down after failing to agree on a plan to bring its own deficits in line. Spain suffers from a particularly toxic mix of bad banks, a collapsing housing market and a staggering 24% unemployment rate. “Europe is a mess, and its banking system is in denial,” says Lisa Shalett, chief investment officer for Merrill Lynch Global Wealth Management. “The day of reckoning is still in the future.” The situation is creating bargains in multinational powerhouses, such as engineering giant Siemens (symbol SI) in Germany. “These companies compete globally—they just happen to be domiciled in Europe,” says RegentAtlantic portfolio strategist Greg Allison.


Stocks in the U.S. (see Where to Put Your Money Now) and in select emerging markets have more to recommend them. China’s growth is slowing, in large part because exports to Europe are falling. But a “slow” economy in China translates into 8% to 8.5% growth this year, says IHS Global Insight chief economist Nariman Behravesh. India should log growth of 7%; Brazil, about 3.5%. Emerging-market central banks, many of which have tightened monetary policies over the past year to slow formerly overheated economies, will ease their policies later this year to keep growth on track. “When we see that kind of loosening, it’s time to increase investments in emerging markets,” says Katherine Nixon, chief investment officer for personal financial services at Northern Trust.

For investors with a long-term view, emerging markets should represent a core holding. Many markets are transitioning from export-driven economies to more balanced ones, in which homegrown consumers contribute more to growth. With that balance comes increased calm. Last year, emerging markets were collectively about 25% less volatile than their decade-long average, says Shalett. Steve Huber, fixed-income chief at T. Rowe Price, says emerging-markets bonds are a good way to play what he expects will be a long-term decline in the value of the dollar against currencies of developing nations.

Depending on age and risk tolerance, investors should probably earmark as much as 20% to 30% of their stock assets and perhaps 5% of bond holdings for overseas investments. Mutual funds are a great way to approach the market. Stock funds we like include Dodge & Cox International Stock (DODFX) and T. Rowe Price Emerging Markets Stock (PRMSX). For emerging-markets bonds, we like the flexibility of Fidelity New Markets Income (FNMIX). All are members of the Kiplinger 25.