Europe’s “Doom Loop” Creates Buying Opportunities
Legendary investor Warren Buffett has often said: “Be greedy when others are fearful.” There’s no better example than Europe right now.
To most investors, the region has become too hot to touch. The U.S. and Europe match each other’s bluster over trade disagreements. Italy’s new populist-leaning government adds yet another layer of intrigue.
Put the two developments together, and it’s easy to say: “Too much uncertainty.”
But as Buffett’s old maxim makes clear … there are many opportunities now that most investors have more fear than greed.
Where the Opportunities Are
One of the best? European banks.
A good play on them would be through the iShares MSCI Europe Financials Sector Index Fund (Nasdaq: EUFN).
The exchange-traded fund (ETF) represents a wide cross section of 82 banks and other financial companies across the euro zone and England. Trading at a current net asset value of $21 and change, the ETF is down nearly 15% since mid-February.
At a price-to-book value of 1, this Europe bank ETF is basically trading for the cash its institutions have on their balance sheets.
Yet the annual dividend yield alone gives you 3%.
The Doom Loop
Yep, that’s what happens when a sector gets caught up in a so-called “doom loop.” In the case of Europe’s banks, the doom loop is thus:
- Euro-unfriendly government comes to power.
- Investors worry about disintegration of the euro zone.
- Europe bank stocks tank.
That’s about it in a nutshell … rinse, wash, repeat.
We saw this pattern play out in various forms, with each of the “exits” — including Greece and England, along with a sprinkling of separatist votes, such as Spain’s economically important Catalonia region.
Yet despite wall-to-wall news coverage and no small amount of hand-wringing from analysts and pundits, none of those developments made a dent in Europe’s economy.
For last year’s fourth quarter, Europe’s gross domestic product (GDP) rose at its fastest growth in a decade, at an annualized rate of 2.5% (faster than the U.S., in fact).
Things slowed down a bit for the first quarter this year, but Europe’s economy still grew by 0.5% for the period — on track for a 2.7% gain for 2018.
I expect that growth to continue. And worries over the intentions of Italy’s populist government will wind up being nothing more than a temporary distraction.
Polls of Italian voters show that the vast majority — between 60% and 72% of those surveyed — want the nation to continue using the euro as its currency, and remain a key member of the euro zone itself.
For investors, that leaves the chance to buy a key sector like banks at a substantial discount to their prices at the start of the year, collect a nice dividend and prepare for bigger gains in coming months.
Jeff L. Yastine
Editor, Total Wealth Insider