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. Last Updated: 07/27/2016

Europe May Look Sick, But It's Bound to Boom

WASHINGTON -- For contrarians wary and weary of the euphoria on Wall Street, an intriguing stock market play is Europe. Yes, Europe looks like an economic basket case, but that's just the point. Let me explain ...


While the United States booms, mainland Europe stagnates. The unemployment rate in the United States is 4.8 percent, but in Germany it's 11.4 percent. The U.S. gross domestic product is growing at 4.1 percent annually, but in France it's nudging along at 0.9 percent. Retail sales in Italy and Switzerland actually are falling.


Nor do these countries appear ready to tackle the source of Eurosclerosis. Instead, they're sidetracked over trying to adopt a single currency.


France, which just elected a Socialist government and is busy raising the minimum wage and cutting the work week, seems an extreme example of denial, but Germany is not much better. In an age when businesses need high flexibility to adapt to technology, shifting consumer tastes and fierce global competition, nearly all the European countries (except Britain) burden firms with heavy mandates. Because they can't fire, they don't hire. Or they go offshore, or contract out to foreign suppliers.


But if Europe is such a mess, why buy its stocks? My answer combines optimism and economic determinism: France and Germany, especially, are going to be dragged, kicking and screaming, into the 21st century -- whether they like it or not. About 20 years late, they'll be forced to undergo the same revolution in public policy and business management as the United States and Britain. Otherwise, they'll be left behind as Asia and the Americas rush past.


Also, while Europeans may have a cultural reticence to experiment, they're well-educated and savvy. In a high-tech age, a little economic liberation could do wonders for entrepreneurship.


Now, this is all just a guess on my part, but, despite the election in France and the amazing complacency of Germany, you can begin to see changes -- not so much in government as in business. Just look at Daimler-Benz AG, which is making innovative Mercedes models, some of them remarkably low-priced, all over the world. Other firms, including Deutz, maker of diesel engines, are offering stock options as incentives to employees -- still a novel notion in European companies.


There's only one problem with the idea of contrarian investing in European stocks: Prices aren't cheap. So far this year, the German market, as reflected by the DAX 30 Index, is up 31 percent; France's CAC 40 Index has gained 24 percent. Those figures both beat the comparable U.S. measure of large stocks, the Standard & Poor's 500-stock index, which has returned 20 percent.


Since early April, the American depositary receipts of Lufthansa, the German airline, have soared more than 50 percent. Elf Aquitaine SA, the French oil company, whose ADRs you also can buy on the New York Stock Exchange, is up 55 percent over the past 12 months.


But don't despair. Even at high prices, there are good reasons to consider European stocks, especially using these strategies:


?Think long-term. If you buy European stocks (or, as I prefer to put it, become a partner in European companies), don't expect quick profits. You have to be in for the long haul -- 10 years or more.


?Wait for a downturn. I'm not a market timer, but with European stocks, it may be sensible to invest slowly, feeding money into shares every month or every quarter. Or hold cash on the sidelines, waiting for a decline in prices.