Best European Countries to Invest In and How to Do It

Between the European economic and financial crises, PIGS (Portugal, Ireland / Italy, Greece and Spain) and various eastern European countries’ high debt ratios (and possible bankruptcies), and the devaluation of the euro you may wonder, are any of the European Union (EU) countries a good investment? Which, if any, EU countries hold worthwhile investment opportunities, the value of which has decreased due to economic and financial troubles in the EU? My goal is to find a diamond in the coal mine.

By way of background, a list of 22 countries which use the euro as their currency is available at Euro currency countries. The major European countries that do not use the euro are Denmark, Sweden, and the United Kingdom. The value of the euro has declined by 13% as compared to the US dollar and Chinese yuan (China's government has kept the yuan pegged around 6.83 to the dollar since mid-2008, when the global recession was intensifying) and 18% as compared to the Japanese yen over the last 6 months (as of June 18, 2010). The major advantages associated with decreasing valuation of currency are: exports increase and imports decrease, which helps the trade balance and has an expansionary effect on the overall economy’s aggregate demand. With the devaluation of the euro, the products of countries whose currency is the euro become much cheaper for consumers whose currency is not the euro. For example, the cost of French wines and cheeses should be discounted by 13% over the last 6 months for US consumers. It has the reverse effect for US products that are imported by euro countries where costs have increased by 13% (it has a positive effect if you are planning to go to vacation in Europe). Countries that are selling products which countries outside the euro countries want have a major advantage over countries that are not.

One of the financial crises in Europe is the high debt ratios tied to government debt. PIGS and several eastern European countries have very high debt ratios (budget balance % of GDP) that are not sustainable in either the short or long term. This will increase their cost of debt servicing and their ability to pay off their debt. For example Greece’s 10 year government bond interest is 8.15% and Spain’s is 4.57% (Germany is 2.56%). Since these countries use the euro they cannot downgrade their own currency to pay off the debt in cheaper currency (inflate their way out of debt like the US). The only way they can decrease their debt ratio is by increasing revenue (taxes) and/or decreasing expenditures (for example increasing the retirement age, decreasing funding for programs, etc.). Debt ratios for the following countries (2010):

· Britain -12%

· Canada -4.3%

· China -3.1%

· France - 8.4%

· Germany -5.6%

· Greece - 10.2%

· Ireland - 8.0% (1/2009)

· Spain -9.9%

· United States -8.8%

Ireland is the only PIGS government that has made major cuts in spending and increased taxes. The Irish government in 2009 gave two substantial pay cuts to public sector employees totaling 22.5% and made budget cuts of 4 billion euro. They have increased their taxes by targeting the rich living overseas. This has helped Ireland reduce their 10 year government bond interest rate and contributed to the Ireland market index which has shown a gain over the last 6 months. Their current 10 year government bond is 5.11% (as of 6/21) as compared to Greece’s 8.15%.

Merchandise trade balances for the last 12 months ($ billion - April 2010) are the following:

· France -60.1

· Germany 211.9

· Greece -44.3

· Italy -9.6

· Netherlands -51.3

· Spain -68.8

· Britain -132.5

· US -546.4

· China 132.5

Germany has the highest merchandise trade balance in the world (over the last 12 months) and their balance will increase with the devaluation of the euro.

The following shows major EU stock indexes’ (January 18 to June 18, 2010) performance in euro/local currency: (For euro currency countries subtract another 13% to compare with USD. For example in US dollar valuation Spain’s decrease would have been -32%.)

· Ireland - ISEQ Overall index: .03%

· Germany - DAX index (30 companies): 6.62%

· France - CAC 40 index (40 companies): -7.87%

· UK - FTSE 100 index (100 companies): -4.63

· Spain- IBEX 25 (35 companies): -19%

· Italy- MIB30 (30 companies): -13.92%

· US - DOW index (30 companies): -2.62%

If I was going to invest in one European country’s Exchange Traded Fund (ETF) index it would be either Germany or Ireland. The Germany iShare ETF EWG tracks the MSCI Germany index. It has decreased 14.5% over the last 6 months. The expense ratio is .55% and bid / ask ratio is .95% (the fund has $1.2 billion in assets). It has a nice yield of 2.7%. The major problem with the index is that 19% of the fund assets are invested in the financial sectors and it has been reported by the German financial regulators that German banks’ troubled assets are at 800 billion euro (over 1 trillion in USD). Germany has a high saving rate that generated a lot of capital for German banks to invest. Since the banks had large capital surpluses they invested in a lot of high-risk areas like U.S. toxic assets, Spanish real estate and Irish hedge funds. The banks had debt to net worth of 52 to 1 at the start of the financial crisis as compared to the US of 12 to 1. Germany does however have the largest merchandise trade balance in the world and it should increase with the devaluation of the euro. The decrease in the valuation of the euro helped the companies in Germany to increase sales outside the euro countries.



There is one Ireland index ETF (Shares MSCI Ireland Capped Investable Market Index Fund – RIRL), introduced May 5, 2010 (it has already dropped 20% since its inception). It has only $3 million of assets which will have a high bid / ask ratio. The Irish government has done a very good job of decreasing expenditures and increasing revenues but this ETF does not have enough assets for me to make an investment (I will not invest until the fund has over $100 million in assets).

Vanguard has a very low cost (.16%) European index ETF: Vanguard European ETF (VGK). Since January 1, 2010 the performance is -15.72% (in the euro currency it would be around -3%). The fund has a very good yield of 4.67% and has over $11 billion invested which will reduce the bid / ask ratio.

If you think the euro will reverse its 13% devaluation over the next year in relation to the US dollar, VGK will get a 13% gain (because of the currency change). Personally I am invested in a number of ETFs that have invested outside the US. For example, International non-US market index – Vanguard FTSE All-World ex-U.S. ETF (VEU). VEU has 44% of their portfolio allocated to Europe. I will not at this time increase my exposure to Europe but will continue to monitor European countries. It can have a major affect on stock markets outside Europe (for example the Chinese and the US markets) with the devaluation of the euro, high debt ratios, banking problems, possible countries defaulting on their debt, social unrest caused by increasing the retirement age and decreasing social programs and other difficulties. When the financial minister of Hungary talked about his country’s possibility of future bankruptcy in a newspaper interview, it had a distinct affect on the stock markets around the world the same day; this shows clearly that financial systems around the world are very interrelated. The devaluation of the euro makes it more difficult for China, Japan, the US and other countries’ corporations to sell their product in Europe (because of the higher cost) which will reduce their revenues and profits (which should lower their stock price).

Please chime in with your comments on investing in Europe, how the euro will do in the next year, or anything else.

© 2010 Paul Cusick