Should You Buy European Stocks On Stimulus Hopes?

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February 2, 2016 4:53pm NYSE:VGK

europeBob Ciura:  The U.S. Federal Reserve finally raised interest rates in December for the first time in nearly a decade. This decision was made amid a steadily improving U.S. economy, rising housing market and strong labor market. But in Europe, the situation is nearly the complete opposite.

At a news conference on Jan. 21, European Central Bank President Mario Draghi reiterated his commitment to economic stimulus for as long as is necessary to boost the sagging European economy. His recent remarks indicated he is still fully intent on remaining on a path of quantitative easing.

Draghi’s dovish policy statement should be viewed as a bullish indicator for European equities. As a result, investors may want to take a closer look at European stocks.

European stocks

Super Mario to the Rescue

Europe has mostly missed out on the global economic recovery since the Great Recession. The eurozone member nations are still suffering through weak economic growth, and many are struggling with very high levels of debt and rampant unemployment.

In response, while the U.S. central bank is pursuing a path of tightening monetary policy, the European Central Bank has been forced to continue its easy monetary policies. Draghi stated that economic conditions have worsened in Europe since the last meeting of the ECB’s Governing Council.

Due to low economic growth and collapsing oil prices, the threat of deflation has risen significantly in Europe in the past three months. To combat the devastating effects of deflation, Draghi said there were no limits on possible stimulus measures that could be deployed.

The ECB has left its benchmark interest rate – similar to the federal funds rate in the U.S. – at 0.05%. Meanwhile, the rate on deposits at the ECB is negative 0.3%, which penalizes banks that choose to keep money on the sidelines instead of lending it out to businesses.

European Consumer Stocks Look Attractive

The ECB’s quantitative easing measures should continue to promote economic growth, modest inflation and a healthy consumer. As a result, investors may want to turn their attention to two of Europe’s biggest consumer goods companies: Nestle (OTC: NSRGY) and Unilever (NYSE: UL).

Nestle has a huge portfolio of food brands, including its namesake chocolate and confectionary products, as well as a number of cereal, dairy and frozen foods products. Unilever operates brands like Ben & Jerry’s, Lipton, and Hellman’s. This gives Nestle and Unilever an edge, because their successful food brands provide stable growth and a steady source of profits.

Plus, Nestle and Unilever are both benefiting from foreign exchange. Most investors have no doubt heard that U.S. multinational companies are struggling under the weight of the rising U.S. dollar, which suppresses revenue generated from overseas. But the flip side of this coin is also true: the weakening euro is a tailwind for European-based companies.

Unilever’s total sales rose 10% last year, which is a very strong growth rate for a consumer staples company. Unilever’s sales in the emerging markets rose 7% in 2015. Earnings per share grew 14% year-over-year.

Similarly, Nestle – which reports full-year 2015 results on Feb. 18 – saw organic sales increase 4% through the first three quarters, with 6.8% growth in emerging markets.

Unilever and Nestle are based in Europe, but they derive a high percentage of their sales from outside the continent. Nestle generates slightly less than half of its total revenue from emerging markets, while Unilever derives nearly two-thirds of its sales from emerging markets such as China and Brazil. As a result, neither company is entirely exposed to the economic challenges facing the eurozone.

As an added kicker, Nestle and Unilever pay hefty dividends. Each stock yields around 3% right now. As a result, both stocks look attractive for share price appreciation and dividend growth should the ECB unleash another round of stimulus measures.

This article is brought to you courtesy of Bob Ciura from Wyatt Research.

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