Lower Oil Prices Create Investment Opportunity in Europe

OpportunityLast week, I said that it was time for income investors to adjust their portfolios and adapt to the new reality of cheap oil.

For less-speculative investors, I recommended turning an eye to Europe. This week, I want to expand on that idea and highlight a number of enticing investments across the pond.

You see, most U.S. investors have very little money in Europe.

They believe that the continent is destined for low growth and, to the extent they invest overseas, believe Asia and emerging markets offer better opportunities.

[ad#Google Adsense 336×280-IA]However, as oil prices have just dropped from $100 to $58, that belief is wrong.

In fact, Europe is the main beneficiary of the price drop because it produces so little oil.

Thus, Europe should see an economic renaissance in 2015… and we need to position ourselves for the likely stock market rally.

An Unexpected Boost

The European Union (EU) was 88% dependent on foreign oil imports in 2012, up from 76% a decade earlier. That compares with a U.S. import dependency of 30% (and declining).

Thus, the savings in the EU from a $40-per-barrel drop in oil prices amounts to an astounding $250 billion, or about 1.4% of gross domestic product (GDP). That’s one hell of a boost for an economy that’s expected to grow just 1.3% in 2015, according to the IMF’s World Economic Outlook.

What’s more, Europe is mostly immune to the negative effects of oil’s plunge that are haunting the United States, including the potential bankruptcy of tar sands, shale fracking, and deepwater drilling companies. These expensive oil sources simply don’t play a large part in the EU’s oil economy.

On top of that, the European banking sector is less exposed to oil prices than the U.S. banking sector.

Of course, within the EU, some countries (such as Greece) are in too much trouble to benefit much from the oil price decline, while other countries (such as France) are so badly run that much of the additional cash will be absorbed by government boondoggles.

But the well-run countries – mostly in the northern half of the EU – should see substantial benefits, as should companies doing most of their business in those countries. In general, consumer goods companies will benefit from a boost in spending, and automobile companies specifically will see a sales boost from the price decline.

Plus, European stocks are still trading below their 2007 highs, as measured by the MSCI Europe Index, so there’s likely to be more upside potential than in U.S. markets.

On the Lookout for Income Opportunities

For income investors, the choices in Europe aren’t particularly numerous, since investable stocks must pay decent dividends and also have ADRs trading in New York with an adequate amount of liquidity.

One solution is investing in a Europe-centered income fund. These funds are less restricted and allow us – through the London Stock Exchange and other European exchanges – to invest in European companies that don’t have any significant trading in New York.

One such fund is the First Trust STOXX European Select Dividend ETF (FDD), which attempts to match the performance of the STOXX Europe Select Dividend 30 Index. FDD has a yield of 4.4%, an expense ratio of a moderate 0.6%, and an average P/E of only 11x. Its main disadvantage is that a third of the fund is invested in financial stocks, which are as vulnerable in Europe as they are here.

Among individual stocks, the following four are worth examining:

  • I can’t help being drawn to German-based automaker Daimler AG (DDAIF.PK). Based on its most recent $3.12 dividend (it pays dividends once a year, in April), it yields 3.6% and has a forward P/E of 10x. Daimler should benefit from a general rise in consumer spending, especially because it boasts a fleet of large, powerful cars and trucks that do especially well in periods of low oil prices.
  • Meanwhile, in the consumer products sector, Unilever (UN) looks attractive in spite of its P/E (17.5x is higher than I prefer). It has an attractive dividend yield of 3.6%, and its products are in households worldwide – meaning it should benefit from increased consumer spending, in general.
  • Among the European banks, Deutsche Bank (DB) is strongest because of both its home economy and its powerful global investment and corporate banking presence. Although DB’s dividend yield is barely acceptable at 3%, its prospective P/E ratio of 10.1x and price-to-book value ratio of only 50% are both very undemanding and suggest that any upturn in its business will result a rapid re-rating.
  • Finally, for a presence in both Europe and emerging markets and a yield of 4.1%, the French drug company, Sanofi (SNY), is worth examining. With earnings projected to increase rapidly and a prospective P/E ratio of only 13.9x, SNY gives you exposure to both the EU and consumer spending worldwide.

Good investing,

Martin Hutchinson


Source: Wall Street Daily