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Investing in European Stocks

Written By Brian Hicks

Posted June 16, 2008

"There’s a lot of talk that Europe could be dead," my colleague Andrew told me this morning from Marseille, France.

He’s talking about the "no" vote that Irish citizens returned in last week’s referendum on a document that would create a more solid structure for the European Union.

The Lisbon Treaty was crafted in the Portuguese capital (and my first stop on a major research junket in July), but its guidelines on issues like trade and foreign affairs have to be ratified by each of the EU’s 27 member states.

A few years ago, it was France and the Netherlands that shocked the rest of the continent by rejecting the EU constitution in a referendum.

So the Lisbon Treaty was introduced in 2007 to keep the EU from losing its momentum.

Now, the Irish opt-out has European politicians scrambling—there’s a "crisis summit" set for Thursday in Brussels—and European citizens are wondering what will become of their economies.

Amid the uncertainty, European market opportunities are still alive and kicking. Here’s why you should still be investing in European stocks.

Europe is Growing in More Ways than One

Even in Europe’s wobbly political landscape, retail trade is booming as 12 new member states in the east boost continental numbers.

Official EU number crunchers at Eurostat say that even though retail trade fell by 5.6% in Germany, 3.3% in Spain, and 2.9% in Austria from April 2007 to April 2008, Romania logged a huge increase of 18%, Lithuania came in with a 14% rise, and Bulgarian commerce soared by 10.1%.

I’ve already detailed strategies for getting your money into these dynamic new eastern European EU member states, highlighting individual stock plays like Central European Distribution (NASDAQ:CEDC).

CEDC is up 13% over the past month against the Dow’s nearly 6% decline, because it’s capitalizing on exactly the kind of growth in emerging Europe that’s keeping the whole EU’s head above water.

New EU members are delivering on growth expectations, so it’s actually inflation that has European economic captains worried.

Inflation in the 15-nation euro common currency area hit a 16-year high in May, led by food, transportation, and housing.

As part of the global threat of rising commodity prices and easy money feeding a wage-price spiral, the European Central Bank is expected to nudge interests rates up as early as July.

That could hurt investors’ appetites for European equities in the near term, but European ETFs are still solid as long-term holds.

Investing in European Exchange-Traded Funds

Warren Buffett ran around Germany last month looking for the kind of companies we focus on in Global Growth Stocks.

"The Oracle of Omaha" went to Europe’s dominant economy seeking "…large, well-run companies that we understand right away."

"I’m looking for companies with a long-term, permanent competitive advantage," Buffett said, confirming the value of European industrial power and future growth in the EU, where Germany is a central player.

The iShares MSCI Germany Index Fund ETF (NYSE:EWG) is heavy on such Teutonic titans, like energy company E.On (OTC:EONGY), engineering powerhouse Siemens (NYSE:SI), and pharmaceutical big-shot Bayer (OTC:BAYRY).

Since E.On and Bayer both trade only as over-the-counter American depositary receipts (ADRs), I recommend adding them to your portfolio by purchasing EWG shares so you avoid liquidity problems.

The iShares MSCI Italy Index ETF (NYSE:EWI) holds big international names like energy company Eni (NYSE:E), and auto maker Fiat (OTC:FIATY) in addition to more localized firms such as Telecom Italia (NYSE:TI).

The current downside to investing in European blue chips is that they’re in the doldrums along with the Dow. It’s not the Lisbon Treaty, but sluggish consumer sentiment and tightened credit that’s hurting most now…

But there’s plenty of upside for those who believe, as I do, that European economic growth and EU integration will overcome Ireland’s recent rejection of union plans.

The Lisbon Treaty must be ratified by all 27 EU member states by the end of this year. We’ll keep you up to date with what happens, and tell you how to play it.



Sam Hopkins

P.S. – Global Growth Stocks subscribers will get first crack at a slew of promising European recommendations made straight from Sam’s European trip next month. If you sign up, you’ll also get exclusive multimedia reports and word from companies the GGS portfolio has already played for gains. To learn more, click here: