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Count to 10 Before Betting on a Europe Rebound

Greece, Portugal, and euro woes may tempt contrarians, but issues abound.

Gregg Wolper, 05/05/2010

Greece's financial travails have been making headlines for several months now. Lately the economic woes of Portugal and a few other European nations--most notably Spain--have pushed them into the spotlight as well. Their bonds have fallen in value. The euro is suffering. Stock prices in many European markets are also feeling the pain.

Such overwhelmingly negative news often prompts canny investors to think of ways to benefit. To take the contrarian path. After all, you don't have to be Warren Buffett to know that juicy opportunities can arise when others are running for the exit.

But that doesn't mean you should rush to buy a Europe-stock fund. For one thing, most of the region's stock markets haven't fallen all that far, and the euro isn't even close to its historic low. Further declines are hardly out of the question. Second, even if you've decided the pessimism is overblown and are inclined to jump in, making such a play isn't a simple task. As with any other investment, it makes sense to investigate before buying.

The following is far from a comprehensive list of factors to consider. But if you're thinking of investing in a Europe fund as a contrarian move, here are a few things to keep in mind.

1. You may already have substantial exposure to Europe. Funds in the foreign large-cap categories tend to have huge weightings there. The average is roughly 60%, and for some portfolios the figure is higher. Templeton Foreign TEMFX, for example, had about two thirds of its assets in Europe at the end of February 2010, and on March 31, Causeway International Value CIVVX was stashing more than 70% of its assets there.

2. By and large, Greek and Portuguese stocks play almost no role in international funds. That's true even for those funds that specifically target Europe. At the end of March 2010, for example, T. Rowe Price European Stock PRESX had just 1% of assets in Greece and 0.3% in Portugal. Those numbers are typical of other pan-Europe funds, though a few had a tiny bit more in Greece.PAGEBREAK

3. By contrast, Spain weightings in Europe-stock funds vary widely. BlackRock EuroFund MDEFX had just 2% of assets in Spain in its March 31 portfolio, while T. Rowe Price European Stock had more than 10% in Spain at that time.

4. A continued fall in the euro will be a negative when Europe-stock fund returns are translated into dollar terms for U.S.-based shareholders, but a further decline in that currency wouldn't be all bad from an investor's perspective. Exports play a big role in the fortunes of many European companies, and a weak euro makes the goods and services of eurozone companies more attractive to potential buyers outside of that zone.

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