Greece, Portugal, and euro woes may tempt contrarians, but issues abound.
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
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
3. By contrast, Spain weightings in Europe-stock funds vary widely. BlackRock EuroFund
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.
5. Don't assume that even an unhedged Europe-stock fund will provide full exposure to a potential euro rebound down the road. In fact, half the weighting of the MSCI Europe Index consists of countries that do not use the euro (the United Kingdom, Switzerland, Sweden, Denmark, and Norway). Those other European currencies sometimes move more or less in line with the euro, but on occasion--as in 2010--there can be sharp differences.
6. If you're hoping to cash in on a rebound in the euro, don't buy Mutual European
7. More-targeted plays are available in the exchange-traded arena, but those too have traits that render them less than ideal. For example, iShares MSCI EMU Index
8. Until recently, a closed-end fund known as Spain Fund
9. Remember that the returns of the Europe-stock category provide only an imperfect indicator of how "Europe" is faring. That fund group includes not just pan-European funds, but also a handful of specific Russia/Eastern Europe offerings, along with some small-cap specialists and other narrowly focused portfolios--all of which can skew the category averages. That's happened in 2010: Through April 30, Vanguard European Stock Index
10. Finally, the above points are aimed at investors thinking of investing in stock funds. But it's safe to say that trying to make a play on the fixed-income side also would involve numerous complexities--some of them very different from the ones cited here. So it would make sense to tread even more carefully in that realm.
Gregg Wolper is a senior analyst with Morningstar.
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