Where To Find Good Value In Europe (EWG, EWI, EWP, EWN, IEV)

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January 23, 2012 5:29pm NYSE:EWG NYSE:EWI

Russ Koesterich: Call #1 – An Update on Europe & Overweight Norway:  While there have been developments toward solving the European debt crisis in recent months, more needs to be done.

Funding costs for Italy (NYSEArca:EWI) and Spain (NYSEArca:EWP) remain high, particularly for Italy. It also looks more likely that at some point in the next year or two Greece will need to default and potentially leave the euro zone. Europe (NYSEArca:IEV) also has yet to definitively address the fiscal and growth problems in the peripheral countries.

With the European crisis dragging on and Europe likely to experience at least a mild recession this year, stocks in the region have become very cheap — the Euro Stoxx Index is trading at 8.3 next year’s earnings. I still, however, continue to be cautious on the region overall and advocate avoiding large parts of Europe – particularly Spain and Italy. These markets are cheap for a reason.

Still, I do like some countries in the economically stable northern region of the continent. Much of Northern Europe arguably represents a good value for long-term investors when you consider these countries’ current valuations, growth prospects and perceived risk. I’m reiterating my overweight views of Germany and the Netherlands, and I’m also now advocating an overweight position in Norwegian equities.

From a valuation perspective, you can buy global large caps in Northern Europe for virtually the same price as the more fundamentally challenged companies in southern Europe. Stocks in Germany’s DAX index, for instance, currently trade at less than 9x next year’s earnings, while equities in Norway and in the Netherlands are trading at just 8.5x next year’s earnings.

Meanwhile, countries in Northern Europe, particularly the Nordic countries, are generally expected to grow faster than other developed markets. Based on International Monetary Fund forecasts, Sweden, Finland and Norway should post economic growth this year well above the developed market average.

Finally, based on current credit default swap spreads, these countries are perceived as less risky than the problem children further to the south. This is largely due to Northern  Europe’s very modest debt burdens [potential iShares solutions: iShares MSCI Germany Index Fund (NYSEArca:EWG), iShares MSCI Netherlands Index (NYSEArca:EWN)].

Source: Bloomberg

International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations.  Securities focusing on a single country may be subject to higher volatility.

Written By Russ Koesterich From The iShares Blog Disclosure: Author is long EWG and EWN.

Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist as well as the Global Head of Investment Strategy for BlackRock Scientific Active Equities. Russ initially joined the firm (originally Barclays Global Investors) in 2005 as a Senior Portfolio Manager in the US Market Neutral Group. Prior to joining BGI, Russ managed several research groups focused on quantitative and top down strategy. Russ began his career at Instinet in New York, where he occupied several positions in research, including Director of Investment Strategy for both US and European research. In addition, Russ served as Chief North American Strategist for State Street Bank in Boston.

Russ holds a JD from Boston College Law School, an MBA from Columbia Business School, and is a holder of the CFA designation. He is also a frequent contributor to the Wall Street Journal, New York Times, Associated Press, as well as CNBC and Bloomberg Television. In 2008, Russ published “The ETF Strategist”(Portfolio Books) focusing on using exchange traded funds to manage risk and return within a portfolio.

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