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Europe: Coming back

euro crisis FEAX

By Sheila Kilb and Joel Dresang

Although it has tempered its forecast for the eurozone’s growth for the rest of 2014, the International Monetary Fund has declared the region in recovery.

Recent visits to two of the more financially troubled European Union countries – Italy and Spain – helped confirm mixed reports of the region’s comeback:

  • Every morning in Rome, a gray-haired man stands outside his restaurant greeting customers with a smile. And every night, he does the same. His business is always buzzing with customers. Other restaurants appear to be faring similarly, thanks to a profusion of tourism.
  • Likewise, in Barcelona, diners fill restaurants and cafés. A well-dressed crowd flows toward a weeknight performance at the opera house. Long lines of tourists snake around Antonin Gaudí’s Sagrada Família, amid cranes, scaffolding and construction crews.
  • On the other hand, Rome’s homeless population is vast and suffering. One young physically deformed man sits on a skateboard and pushes himself around a neighborhood. Dozens of homeless people of all ages sleep outside near the Vatican at night. During the day, the same people beg amid vendors who line the streets, desperately trying to sell knock-off brand products and souvenirs.
  • In Spain, “for rent” signs compete with graffiti in most urban areas, indicators of still-struggling commercial districts and soaring youth unemployment. The graffiti includes slogans and symbols denouncing capitalism and advocating anarchy.

Europe’s revival from double-dip recession has been drawing attention from more investors. While the S&P 500 index has been re-establishing all-time highs since early 2013, the Euro Stoxx 50 index just recently climbed back to its level before the 2008 financial crisis.

(Editor’s note: Sheila Kilb, a Landaas & Company finance intern, and Joel Dresang, vice president-communications, made separate visits to Europe recently. They offer some of their observations as perspective on the recovery of the 28-country European Union, the world’s second-largest economy, eclipsing China in combined gross domestic product.)

The eurozone remains a far car cry from its stock market highs in 2000, but prospects are starting to look up again. The road back is rocky, warns Brian Kilb, executive vice president and chief operating officer at Landaas & Company.

“You buy because things are cheap and because there’s an opportunity to generate some momentum in those markets,” Brian said during a Money Talk podcast. “Many of the foreign markets are relatively cheap. But you’ve got to be a little bit careful when you’re trying to determine whether there’s still an opportunity for growth or whether there are still some significant problems ahead for some of those areas.”

Marc Amateis, vice president and investment advisor at Landaas & Company, noted that because Europe’s recovery is at an earlier stage than in the U.S., there possibly could be more potential for growth.

“You’ve got the European Central Bank talking about doing whatever it takes to make sure that they don’t slip back and go into recession,” Marc said. “Money will move where it’s treated best. As credit expands and money becomes more freely available in those countries, and based on suppressed valuations, those markets could do well.”

In an increasingly global economy, investors risk being too centered on domestic funds. Though the world’s largest economy, the majority of publicly traded stocks are outside the U.S. Also, the mature U.S. economy is expected to grow at a slower pace than the rest of the world overall. Part of the balance necessary for long-term investors includes attention to geographic diversity.

“It’s a matter of course that we’re always looking throughout the world for investment opportunities – whether in stocks or bonds,” Brian said. “You’ve got to continue to remind yourself that there are several additional elements of risk from investing overseas.”

Among the added considerations for overseas investments:

  • Currency exchange rates
  • Geopolitical uncertainties
  • Liquidity of markets
  • Integrity of financial information

“Where there is opportunity, there also is additional risk,” Brian said. “We have to keep that in mind when we’re evaluating the makeup of portfolios.”

Sheila Kilb is a finance intern at Landaas & Company. She is a junior at the University of Wisconsin.

Joel Dresang is vice president-communications at Landaas & Company.

(initially posted July 31, 2014)

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