Seek exposure to a broad set of EU stocks

AFTER a tumultuous and testing first six months of 2010 for Europe, a calmer and less chaotic second half appears to lie ahead. This is, perhaps, unsurprising – after all we have just endured a sovereign debt crisis and a stagnation of growth, which sent stock markets sharply southwards.

The more optimistic outlook – it would arguably be difficult to be substantially more pessimistic – has caused a number of strategists, such as UBS, to revise their position on Europe.

UBS’s global strategy team last week upgraded Europe (including the UK) to neutral from underweight and remain bullish about the region’s prospects thanks to robust earnings, stress tests that offered at least some transparency and positive economic surprises.

Karen Olney and Nick Nelson, European equity strategists at UBS, explain: “We continue to promote the merits of a region that started the year on the wrong end of the popularity contest…it has compelling valuations, economic data and relief for the banks to boot.”

Yet despite analysts’ more upbeat outlook, investors still need plenty of convincing that European equities are the place to invest and remain sceptical. But with attractive valuations, there are plenty of possibilities for exchange-traded funds (ETFs) investors to get cheap exposure to a region that has been oversold since the start of 2010.

According to Olney and Nelson, there are a number of types of stocks that investors should consider. First, dividend-paying stocks. ETF investors do receive dividend payments providing that the underlying securities pay dividends. These are either reinvested (accumulated) or distributed. Olney says: “Yield on equities has rarely looked this compelling versus other asset classes and we would suggest buying dividends for returns in what could be a range bound market.”

Through BlackRock’s iShares, you can buy the iShares Euro Stoxx Select Dividend 30, which offers exposure to the 30 highest dividend-paying Eurozone stocks from each country included in the Euro Stoxx. Lyxor also offers a Euro Stoxx 50 Dividends ETF denominated in both sterling and euros. This ETF comprises five Euro Stoxx 50 Index Dividend futures and aims to give long-term exposure to dividends as an asset class.


Second, you could consider German equities thanks to both the country’s relative strength and its companies’ international exposure. A weak euro will also have helped its exporters’ competitiveness. Deutsche Bank’s db x-trackers offers an ETF on the Dax 30, the German blue-chip stock index, with a total expense ratio (TER) of just 0.15 per cent. You can also buy call covered warrants on the Dax with both Societe Generale and RBS with a variety of strike prices and expiry dates.

Investors should also look at sectors that have constituents with strong emerging market exposure because these stocks should continue to benefit from faster growth in Asia even if the European economy does suffer from a renewed loss of confidence.

As the graphic shows, those European sectors with the greatest exposure in terms of sales are technology, basic resources, food and beverage and oil and gas. Db x-trackers offers sectoral ETFs, which track the relevant DJ Stoxx 600 indices. These will give you diversified exposure to the European sector and all have TERs of 0.5 per cent.

Europe might be down, but it is certainly not out. While the outlook is positive but still tenuous, investors should seek diversified exposure to income-paying stocks and those with plenty of business in emerging markets.