European stocks, which have lagged their U.S. counterparts dramatically since the bull market began in 2009, are closing the gap. In the first five months of 2017, the MSCI Europe index returned 16.6%—nearly double the return of Standard & Poor’s 500-stock index.
What’s behind Europe’s resurgence? For one thing, European stocks are relatively cheap, trading, on average, at 15 times estimated year-ahead earnings, compared with 18 for the S&P 500. Moreover, European companies are likely to deliver better profit gains than U.S. companies this year. Wall Street sees European companies boosting earnings by 22% in 2017, twice the rate of U.S. firms.
The improved outlook stems from growing optimism about the global economy. The International Monetary Fund expects a 3.5% boost in global growth this year and a 3.6% uptick in 2018. Analysts say that should disproportionately benefit European firms, which generate nearly half of their sales outside of the Continent.
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A simple way to play Europe is with a low-cost index fund, such as Vanguard European Stock (VEURX (opens in new tab)). Its annual expense ratio is just 0.26%. For that, you get exposure to more than 1,100 stocks in 15 developed countries. The portfolio tilts toward giants, with Nestlé and drugmakers Roche and Novartis occupying the top three spots.
For a more streamlined approach, consider Brown Advisory WMC Strategic European Equity (BAFHX (opens in new tab)), which recently held 60 mostly large firms. Manager C. Dirk Enderlein, of Wellington Management, seeks firms with the potential to generate above-average growth in earnings and cash flow. He prefers companies that have technological advantages over their peers. Recent top holdings were financial-services giant UBS, consumer-products firm Unilever and brewer Heineken.
You’re not likely to recognize most of the stocks in Columbia Acorn European (CAEAX (opens in new tab)), which at last report held 49 stocks with an average market value of $3 billion. The fund, which invests mostly in developed Western European nations, favors expanding businesses priced cheaply compared to potential earnings. The fund’s Class A shares levy a 5.75% sales charge but are available load-free at several online brokers.
Editor’s Note: The original version of this article that ran in Kiplinger’s Personal Finance recommended Invesco European Small Company, a fund that is currently closed to new investors.
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