The trouble, money managers say, is that nobody knows when the debt crisis there will end. Most predict it will get worse, perhaps far worse, before it gets better.
That doesn’t mean it’s time to sell everything connected to Europe. The best approach, fund managers say, is to divide the continent into struggling countries and stronger ones.
Q: Which European countries are in better shape?
A: Among the 17 countries that use the euro, Germany is an outlier. It has the largest economy in Europe and the fourth-largest in the world. Key measures of the German economy make it look as if the country broke away from the continent.
Unemployment across the euro countries has hit 10.9 percent, with Spain and Greece above 20 percent. Eight of them are in recession. Borrowing costs for deeply indebted countries hover near what economists consider unsustainable levels. Spain and Italy have to pay slightly less than 6 percent to borrow for 10 years.
By contrast, Germany’s unemployment rate is 6.8 percent. Economists expect the economy to expand nearly 1 percent this year. And Germany is a bond-market darling, borrowing for 10 years at just 1.5 percent.
Sean Lynch, Wells Fargo’s global investment strategist, says his firm is leery of European stocks, except when it comes to Germany.
“We need to stop thinking of Europe as one entity,” Lynch says. “We like Germany. Countries in the northern part of Europe seem to be on much better footing.” He mentions Sweden and Norway, which don’t use the euro.
Q: But companies in Germany sell to customers in Portugal, Spain and other shrinking economies. Isn’t everyone on the same troubled ship here?
A: German companies do depend on customers elsewhere in Europe. That’s why the next step for bargain-hunters is to find those companies in stable European countries that lean on customers in faster-growing markets across Asia and Africa or even the U.S.
For some money managers, German car makers fit the bill. Volkswagen, for instance, sold a record 8 million cars last year, vaulting to the No. 2 spot worldwide, behind General Motors. German drivers bought one of every four Volkswagens, but drivers in South America and Asia bought slightly more. Sales to India doubled. And VW stock has a 2.4 percent dividend yield.
RidgeWorth Investments’ international equity fund has 14 percent of its money in German stocks, including Volkswagen and Adidas. Chad Deakins, the manager, likes Adidas for its far-reaching customer base. The company sells nearly a quarter of its shoes and clothes to the U.S. and Canada, and another 10 percent each go to Latin America and China.
Q: Why should I care? I’m not invested in Europe.
A: Not so. It’s safe to say that if you own a stock fund, you’re exposed to Europe. One vehicle of choice for 401(k) investors is the Standard & Poor’s 500 index, a collection of large, publicly traded U.S. corporations. S&P estimates that the 500 companies in the index get 14 percent of their revenue from Europe. McDonald’s and Kraft Foods get roughly a third of their revenue from Europe.
For health care behemoths Johnson & Johnson and Pfizer, the region counts for a quarter.