Invest in europe now why europes markets will outperform the US in the coming years

Invest in Europe Now! WHY EUROPE’S MARKETS WILL OUTPERFORM THE U.S IN THE COMING YEARS David R Kotok Vincenzo Sciarretta John Wiley & Sons, Inc Copyright © 2010 by David Kotok and Vincenzo Sciarretta All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at www.wiley.com/go/ permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Kotok, David Invest in Europe now! : why Europe’s markets will outperform the US in the coming years / David Kotok, Vincenzo Sciarretta p cm Includes bibliographical references and index ISBN 978-0-470-54701-4 (cloth) Investments–Europe I Sciarretta, Vincenzo II Title HG5422.K68 2010 330.94–dc22 2009049438 Printed in the United States of America 10 To the memory of my mother, Sheva C Kotok (1918–2008), mentor and teacher of English and math, whose reminder of “edit, edit, edit; proofread, proofread, proofread” will guide me all of my days David Kotok To my wife, Babbila, and my first three children, Rocco, Alessandra, and Aurora Yes, the obvious is sometimes the essence of life Vincenzo Sciarretta Contents Foreword ix Preface xi Acknowledgments xvii Introduction Part I Macro Issues Chapter Euro Versus Dollar Chapter Convergence and Integration 25 Chapter Taxation 41 Chapter Stock Market Evolution 53 Chapter Accessing Europe with ETFs 61 Part II Chapter Stock-Specific Strategies Successful Strategies in the Eurozone v 87 89 vi Contents Chapter Valuation 109 Chapter Old Continent Stocks and the Super-Euro 123 Chapter Part III The Guru Chapters 133 When It Is America That Diversifies Out of the Dollar An Interview with William Clark 135 Chapter 10 Yes, Europe Is Cheaper than the United States (and the Gap Is Not Justified any Longer) An Interview with Felix Zulauf 141 Chapter 11 Europe–Asia: The Promising Linkage An Interview with Marc Faber 153 Chapter 12 Eastern Europe: The Prognosis Looks Favorable An Interview with Mark Mobius 161 Chapter 13 Europe Is Moving Toward the Center-Right, the United States Toward the Left An Interview with Edward Yardeni 169 Chapter 14 For Now I Go with Continental Europe An Interview with Ken Fisher 175 Chapter 15 Looking for Gems in the Eurozone Bond Market An Interview with Emanuele Ravano 183 Chapter 16 The Path of Least Resistance Leads to a Stronger Euro and a Weaker Dollar An Interview with Catherine Mann 191 Contents vii Chapter 17 Eurozone Stocks: When Optimism Prevails An Interview with Franỗois-Xavier Chevallier 199 Chapter 18 The Credit Crunch Fallout Is Dreadful Everywhere (but the Eurozone Can Survive) An Interview with Bob McKee 205 Notes 217 About the Authors 227 Index 229 Notes 221 William Witherell, “International Exchange-Traded Funds (ETFs)—Austria,” Cumberland Advisors Retrieved April 27, 2006, from www.cumber.com/ commentary.aspx?file=042706.asp Chapter 5: Accessing Europe with ETFs Standard & Poor’s Indices Versus Active Funds Scorecard, Year End 2008, April 20, 2009, p Based on an equal-weighted count of actively managed funds, measured against corresponding S&P benchmarks Indexes are not investable and not have expense ratios Retrieved August 26, 2009, from http://www2 standardandpoors.com/spf/pdf/index/SPIVA_Report_Year-End_2008.pdf Ibid., p 10 William F Sharpe, “The Arithmetic of Active Management,” Financial Analysts Journal, 47(1) (1991), Investment Company Institute, “2009 Investment Company Fact Book: A Review of Trends and Activity in the Investment Company Industry,” p 61 Retrieved August 26, 2009, from www.icifactbook.org/pdf/2009_factbook.pdf Barclays Global Investors, “Why Taxes Matter—and What You Can Do about It.” Retrieved August 26, 2009, from http://us.ishares.com/topics/tax_efficiency htm;jsessionid=Oge8BhxMBl3r46F9m315kA**.isharescom-pra2?c=HFW98 Morgan Stanley North America, “Exchange-Traded Funds Quarterly Report” (New York: August 11, 2009), p Chapter 6: Successful Strategies in the Eurozone Perhaps the “bible” in this field is James P O’Shaughnessy, What Works On Wall Street, 3rd ed (New York: McGraw-Hill, 2005.) The author illustrates the backtesting of a large number of single-factor and multi-factor strategies applied to U.S stocks from 1952 through 2003 It would be unfair to summarize such an outstanding work in a few skimpy sentences, and the reader is warmly recommended to obtain the book However, generally speaking, O’Shaughnessy found that stocks with low price-to-book, price-to-cashflow, price-to-sales, or price-to-earnings ratios did dramatically better than stocks with correspondingly high ratios He also proved that stocks with low price-to-book, price-to-sales, or price-to-cashflow ratios tended to deliver higher annual rates of return than the market averages, but with higher volatility, so that on a risk-adjusted basis the results were mixed (better if the benchmark was formed by a universe of large stocks) Equally significant, O’Shaughnessy noted that by combining low price-to-book, price-to-sales, and price-to-earnings ratios with high relative strength, the performance of the portfolios vastly improved, beating the benchmarks both on a simple annual-return basis and on a volatility-adjusted basis Of course, the book offers much more to the reader, and the only way to unveil its treasures is by reading it Chapter 7: Valuation Teun Draaisma, Ronan Carr, Graham Secker, Edmund Ng, Matthew German, “Valuation Gap Europe Versus US Close to 35-year Low” (London: Morgan Stanley Research, June 22, 2009) 222 Notes Bank of America—Merrill Lynch Research, Fund Manager Survey Global (March 18, 2009), www.ml.com/index.asp?id=7695_7696_8149_113521_113613_11361 In 2005–2007 the net percentage of global managers overweighting Europe was steadily above 30 percent Early in 2009, global managers decisively shifted to an underweighting position Ibid Our estimates based on mutual fund national associations data Citigroup, “European Equity Strategy,” July 30, 2009 Ibid Boston Fed’s “Monthly Mutual Funds.” www.bos.frb.org/economic/mmfr/ mmfr2007/jun2007.pdf, accessed August 31, 2009 June 2007 The ratio of Total Assets World Equity Funds to Total Assets Equity Funds is calculated by the Investment Company Institute, 1401 H St., NW, Washington, DC 20005 The higher the ratio, the larger the allocation abroad It reached a top of around 26 percent early in 2008 and then declined to about 23 percent late in 2008 and early in 2009 (as we write, data are available until June 2009) World Equity Funds are the sum of the following four categories: Emerging Markets Funds: invest primarily in companies based in various lessdeveloped regions of the world Global Equity Funds: invest primarily in equity securities traded worldwide, including equity securities of U.S companies International Equity Funds: must invest at least two-thirds of their portfolios in equity securities of companies located outside the United States Regional Equity Funds: invest in companies that are based in a specific part of the world, such as Europe, Latin America, the Pacific Region, or specific countries Equity Funds are the sum of the following three categories: A Capital Appreciation Funds: including aggressive growth funds, growth funds, and sector funds B World Equity Funds: including (1) through (4) listed above C Total Return Funds: including growth and income funds and income equity funds Factset estimates on Morningstar data www.factset.com/subscription Accessed August 31, 2009 Stephen Jen, “US Dollar, The Biggest Dollar Diversifiers Are American,” London, Morgan Stanley Research July 19, 2007 10 Greenwich Associates, April 2008, as presented by William Clark, Director of Investment State of New Jersey, to a Global Interdependence Conference in Paris on May 13, 2008 11 Bank of America—Merrill Lynch Research, op cit 12 BCA Research, European Investment Strategy, July 12, 2009 www.bcaresearch com 13 Garfield Reynolds and Wes Goodman, “Pimco Says Dollar to Weaken as Reserve Status Erodes.” Retrieved August 19, 2009, from Bloomberg.com www.bloomberg.com/apps/news?pid=newsarchive&sid=aCM5WaqsP.98 Warren E Buffett, “The Greenback Effect,” New York Times (August 19, 2009) http://warrenbuffett.valuestockplus.net/the-greenback-effect 14 Will and Ariel Durant, “Socialism and History,” in The Lessons of History (New York: Simon and Schuster, 1968), pp 60–61 Notes 223 Chapter 8: Old Continent Stocks and the Super-Euro “Global Exposure Guide 2007,” November 16, 2007 A weak dollar phase was defined as a period without a 10-percent dollar rally London: Morgan Stanley Research, Euroletter by Teun Draaisma, Graham Secker, Ronan Carr, Edmund Ng, Charlotte Swing, Matthew Garman Our estimates on data from Eurostat and the Bureau of Economic Analysis http/epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database and www.bea.gov/index.htm HSBC note, June 10, 2009 Morgan Stanley, European Strategy, London, September 29 2008 Gary Shilling’s Insight, August 2009 www.agaryshilling.com/insight.html Global Exposure Guide, op cit For instance, in the Morgan Stanley study cited in endnote 1, a 10-percent fall in the dollar was associated with an estimated decline of 3.1 percent in 2008 European earnings Chapter 9: When It Is America That Diversifies Out of the Dollar The conference was organized by the Global Interdependence Center (Paris, May 13, 2008) Serious investors may want to take a look at the organization, of which the co-author of this book, David Kotok, is program chair www.interdependence.org/ William Clark’s presentation was titled “Strategic Impact of Currency Risk on U.S Institutional Investors.” According to Greenwich Associates, the asset mix of U.S pension funds augmented the share of alternative investments in the last few years Equity real estate rose from 3.9 percent in 2005 to 4.9 percent in 2008, private equity moved from 3.6 to 5.4 percent, and hedge funds from 1.9 to 3.3 percent Chapter 10: Yes, Europe Is Cheaper than the United States (and the Gap Is Not Justified any Longer) According to a Morgan Stanley report that this book quoted earlier (Morgan Stanley, European Strategy) Calculations looked at Europe, including the UK 2009 net debt-to-equity for Europe ex financials was 58 percent versus 44 percent for the United States However, five out of nine nonfinancial European sectors had lower debt ratios than their U.S peers Outside technology and health care, where the United States showed a marked advantage, cumulative gearing levels were quite similar Chapter 11: Europe–Asia: The Promising Linkage GloomBoomDoom Marc Faber Limited www.gloomboomdoom.com, accessed August 31, 2009 I provided the website; Marc Faber publishes the report monthly 224 Notes Chapter 12: Eastern Europe: The Prognosis Looks Favorable As of August 31, 2009, the top 10 holdings for the Templeton Eastern Europe Fund were as follow: (1) Turkiye Vakiflar (10.36 percent of the portfolio), a bank in Turkey (2) Egis Nyrt (8.96 percent), a Hungarian group whose principal activities are the production and sales of pharmaceutical raw materials (3) OTP Bank (7.41 percent), the largest commercial bank in Hungary, operating in Central and Eastern Europe (4) CTC Media (6.39 percent), a leading media company in Russia (5) Lukoil Holdings (5.99 percent), Russia’s oil giant (6) Erste Bank (5.18 percent), a retail bank, based in Vienna, Austria It has a vast exposure to Central and Eastern Europe (7) Turkiye Is Bankasi (4.68 percent), Turkey’s first public bank (8) Kazmunaigas Exploration Production (4.47 percent), an oil and gas company operating in the Republic of Kazakhstan (9) OMV AG (3.61 percent), Austria’s biggest oil and gas company, with important activities in other Central European countries (10) Polnord (3.3 percent), a construction company and developer in Poland Stocks in a portfolio continually change A reader can have a sense of Dr Mobius’ current positions from Templeton’s publicly disclosed fund holdings, posted on their website, www franklintempleton.co.uk/uk/jsp_cm/funds/all_factsheets.jsp Chapter 14: For Now I Go with Continental Europe Kenneth Fisher, “1980 Revisited,” Forbes (March 3, 2000) www.forbes.com/ columnists/free_forbes/2000/0306/6506186a.html, accessed September 14, 2009 Chapter 15: Looking for Gems in the Eurozone Bond Market Peter Temin, “A Market Economy in the Early Roman Empire,” (February 2001) http://papers.ssrn.com/sol3/papers.cfm?abstract_id=260995 Accessed September 14, 2009 Ibid Keynote address by Jean-Claude Tichet, President of the European Central Bank at the National Association of Business Economics, Philadelphia, October 5, 2004 The yield curve of a debt instrument is the relationship between the interest rate and the time to maturity For instance, if each successively longer-term maturity offers a higher yield than a shorter-term maturity, the yield curve traces a continually rising slope on a graph Three widely followed theories have evolved that attempt to explain the steepness of the curve: The Pure Expectations Theory holds that the slope of the yield curve reflects only investors’ expectations for future short-term interest rates Much of the time, investors expect interest rates to rise in the future, which accounts for the usual upward slope of the yield curve The Liquidity Preference Theory, an offshoot of the Pure Expectations Theory, asserts that long-term interest rates not only reflect investors’ assumptions Notes 225 about future interest rates but also include a premium for holding long-term bonds, called the term premium or the liquidity premium This premium compensates investors for the added risk of having their money tied up for a longer period, including the greater price uncertainty Because of the term premium, long-term bond yields tend to be higher than short-term yields, and the yield curve slopes upward The Preferred Habitat Theory, another variation on the Pure Expectations Theory, states that in addition to interest-rate expectations, investors have distinct investment horizons and require a meaningful premium to buy bonds with maturities outside their “preferred” maturity, or habitat Proponents of this theory believe that short-term investors are more prevalent in the fixed-income market, and therefore, longer-term rates tend to be higher than short-term rates Chapter 16: The Path of Least Resistance Leads to a Stronger Euro and a Weaker Dollar The elasticity of imports with respect to U.S GDP is larger than the same for exports That usually causes the trade deficit to expand when economies are growing, but it serves as a contracting mechanism when economies are braking In addition, with so much trade being in intermediate products for the supply chain, when world demand falls, so both exports and imports Chapter 17: Eurozone Stocks: When Optimism Prevails La société Alpha Mining www.alphamining.com Irving Fisher, The Debt-Deflation Theory of Great Depressions (New York: Econometrica, 1933) http://fraser.stlouisfed.org/docs/meltzer/fisdeb33.pdf Readers interested in Kondratieff waves can find a large bibliography, including Chevallier’s book Greenspan’s Taming of the Wave (London: Kogan Page, 2000) The basic principle is that economic cycles alternate long periods of high and low growth, drawing a sinusoidal path that generally lasts 50 or 60 years before repeating itself in a similar way Nikolai Kondratieff was the Russian economist who first brought these empirical observations to an international public Chapter 18: The Credit Crunch Fallout Is Dreadful Everywhere (but the Eurozone Can Survive) See two Independent Strategy reports: “Credit Crunch: The Hit to the Liquidity Pyramid,” November 15, 2007; and “Not Halfway Through!” February 27, 2008 www.instrategy.com International Monetary Fund, 30 September 2009 The same organization put the total amount at $4.1 trn in its “Global Financial Stability Review” of April 2009 www.imf.org Bloomberg, code WDCI The International Monetary Fund, on 30 September 2009, said losses amounted to $1.3 trn through the first half of 2009 Ibid About the Authors David R Kotok David R Kotok is the Chairman and Chief Investment Officer of Cumberland Advisors, an independent investment advisory firm that manages over $1.3 billion in individual and institutional separate accounts He cofounded the firm in 1973 and has guided its investment strategy from inception The firm specializes in capital preservation while managing risk and reward The actively managed portfolios include municipal and taxable bonds as well as diversified global equities using exchange-traded funds Mr Kotok maintains an active global presence as the Program Chairman of the Global Interdependence Center (GIC), a Philadelphia-based global trade and monetary policy group In addition to numerous conferences held in the United States, he has also chaired premier investment and monetary conferences and delegations in France, Czech Republic, Ireland, Singapore, Israel, Chile, South Africa, Estonia, Vietnam, and Zambia Mr Kotok’s articles and financial market commentary have appeared in the New York Times, the Wall Street Journal, Barron’s, and other publications He is a frequent contributor to CNBC programs, including Closing Bell, Morning Call, Power Lunch, Kudlow & Company, Squawk on the Street, Squawk Box Asia, Street Signs, and Worldwide Exchange Mr Kotok is a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), the Philadelphia Council for Business Economics 227 228 About the Authors (PCBE), and the Philadelphia Financial Economists Group (PFEG) He has also served as a Commissioner of the Delaware River Port Authority (DRPA), on the Treasury Transition Teams for New Jersey governors Kean and Whitman, on the board of the New Jersey Economic Development Authority, and as Chairman of the New Jersey Casino Reinvestment Development Authority Mr Kotok holds a BS degree in Economics from The Wharton School as well as dual master’s degrees from the University of Pennsylvania Vincenzo Sciarretta Vincenzo Sciarretta is a practicing financial journalist based in Italy He has worked for Milano Finanza, the leading weekly financial magazine in Italy, and for Borsa & Finanza, a financial weekly similar to Barron’s in the United States He has been a contributor to the Economist Intelligence Unit, the research and intelligence unit of publishing company The Economist Group He runs the website www.yeswetrade.com, devoted to individual investors Mr Sciarretta has covered the European and international financial markets for the last 12 years In addition to his journalistic efforts, Mr Sciarretta has a background in technical analysis of stocks and commodities As a technical analyst, he introduced new formulas relative to moving averages that are used by trend-following traders He has published his work in leading journals such as Futures and Technical Analysis of Stocks and Commodities He has also presented his work in Frankfurt, Germany; Milan, Italy; Chicago; Philadelphia; and other locations Mr Sciarretta lives in Sirmione, a beautiful village on Lake Garda, about halfway between Venice and Milan Index Active management, 63–65 Active manager, selection, 64–65 Airline industry, problems, 156 Asia, wealth (increase), 155 Asia Tigers, Eastern Europe (contrast), 165 Asset prices, increase, 209 Back-end groups, structural leaders, 151 Banking sector, performance (comparison), 212 Banks bailout, 208–209 capital, adequacy, 208 impact, 180–181 Berlusconi, Silvio (problems), 181–182 Bernanke, Ben expansionary policies, 120 gold, relationship, 157 BLDRS Europe 100 ADR ETF, 75 Brazil, Russia, India, China (BRIC) countries domination, 39–40 export performance, 124 free market entry, 202 Bretton Woods, collapse, 26 Broad-market European ETFs, 74 Bush, George expansionary policies, 120 public dislike, 181–182 Capital, raising (loss coverage), 208 Capital outflows, limits, 193 Capital transfers, 193 Central banks, impact, 1519 Chevallier, Franỗois-Xavier (interview), 199 China currency change reluctance, 214 dollar assets, value loss (impact), 214–215 economic power, 154 Japan, contrast, 156 overseas investments, 214–215 Christian Democratic Union, majority, 170 Clark, William (interview), 135 Commodity boom, occurrence (possibility), 147 Continental Europe investor preference, 179 overweight position, 181 Corporate bonds government bonds, interest-rate differential, 187 purchase, 187 Corporate Europe, corporate America (leverage contrast), 146 Corporate income taxation, 50 Corporate market, condition, 184 Corporate taxation, 44–45 Covered bonds, 188 Credit crisis, cost, 211 Credit crunch (2008), 91 fallout, 205 Credit markets, improvement, 209 Cross-border equity-capital flows, enhancement, 27 Cross-border stock trading, initiation, 54 CTC, enterprise-value-to-EBITDA ratio, 163 Currencies devaluation, 197 transfer, 7–12 229 230 Index Debt deflation, theory (understanding), 201–202 Debt-to-equity increase, 201 ratio, correction, 201 Debt-to-GDP ratio, decrease, 30 Deficit, structural correction, 196–197 Deflationary forces burden, 120 strength, 152 Deleveraging increase, 213 process, 144 Dividends government obligations, contrast, 144 tilt, 83 yield, 97 Dividend-weighting methodologies, 83 Domestic consumption, Fed targeting, 157 Dow Jones EURO STOXX Index, 91 compound return, 95 decrease, 92–93 homogenous comparison, 97 increase, 118–119, 121–122 performance, 99 price-to-book ratio, 111, 114 Dow Jones Global Index, outperformance, 118 Dynamic portfolio, usage, 151 Earnings cycle, 115–117 Eastern Europe, 157–158 Asia Tigers, contrast, 165 big brother, 165 exposure, losses, 212 labor costs, competition, 164 per-capita income, increase, 167 prognosis, 161 wages/salaries, decrease, 164 Economic and Monetary Union (EMU), emergence, 26 Economic Outlook (OECD), 129, 131 Economic recovery, bank assistance, 209 Emerging economies, Europe attention, 173 Emerging markets Europe, strength, 124–129 inexpensiveness, 161–162 Morgan Stanley definition, 126 valuation, fairness, 162 Enterprise value to EBITDA (EV/EBITDA), 98–99 Enterprise value to sales (EV/S), 98–99 Equities euro-area investment fund holdings, 37 markets, valuations (change), 142–143 price-to-earnings ratio, 91 selection, 180 Euro convergence, strength, 36–37 ECB determination, 11–12 creation, 7–12 deficit-to-GDP ceiling, 166 demand/supply, 194–195 dollar comparison, 13–14, 171 competition, 148 mirror image, 171 exit, 148–149 global capital reallocation, 19–22 investor allocation, 194 lifespan, 21 outlook, 22–23 peak, 197 power, 14 strength, 171 world reserve percentage, 13 Euronext, 56 Europe access, ETF (usage), 61 Asia, linkage, 153 center-right direction, 169 corporate taxation, decrease, 49–51 dividends, 110–111 focus, 77–78 economic framework, 26–33 Eurozone, relationship, 73–76 exchanges, 54–58 development, 56 leverage position, 212–213 market multiple levels, 109–115 national champion banks, support, 188 outperformance, 59–60 price-to-earnings ratio (P/E ratio), 109–110 stock indexes, valuation, 173 stock performance, US comparison, 171 taxation, 43–44 United States contrast, 36–40 valuation, contrast, 121–122 European Central Bank (ECB) deflationary spiral, impact, 189 equities, euro-area investment fund holdings, 37 Index Federal Reserve, contrast, 15–19 formulation, 15 monetary policies, 15, 59 European Central Bank (ECB), creation, 8–9 European Monetary Institute, creation, 26–27 European Monetary Union, Germany entry, 145 European Union (EU) creation, 8–9 enlargement, 25–26 expansion, 57 financial structure, transformation, 27 growth, deceleration, 35–36 tax burden, 46–47 Europe market ETF choices, 70–84 integration, 26–27 benefits, 27–30 United States market, contrast, 58–59 Europe-specific ETFs, 73 Eurozone, 76–77 banks leverage level, 146 losses, 207–208, 212 bond investments, opinion, 158–159 bond markets investments, 183 U.S bond market, contrast, 185 creation, benefits, debt-to-GDP ratio, increase, 120 ECB requirements, 166 economy, strength, 202–203 equities, 97 overweighting, 114–115 government bonds, comparison, 215 growth, 184 home bias, 193 households, personal disposable income, 213 indexes, decrease, 119 market, outperformance, 114 recovery, 214 savings rates, 145 stocks impact, 136 optimism, 199 strategies, 89 United States, contrast, 142–143 Exchange rate, fundamentals (impact), 192–193 231 Exchange Rate Mechanism (ERM), 23, 26 Exchange-traded funds (ETFs), 65–70 benefits, costs, reduction, 67 creation/redemption process, 69 definition, 65 developed markets, 71–72 emerging markets, 72–73 investments, 203 market approach, 85 option, 61 purchase, reason, 69–70 sector exposure, 82–83 tax efficiency, improvement, 68–69 usage, 60 Faber, Marc (interview), 153 Federal Reserve actions, inconsistency, 176–177 domestic consumption targeting, 157 dual mandate, 18 ECB, contrast, 15–19 monetary policies, 59 money supply, increase, 119–120 policy independence, erosion, 17 risk management, Greenspan introduction, 17–18 unanimity rule, 16–17 U.S politics, impact, 16 Financial assets, American holders, 117–118 Financial crisis (2008-2009), 36–40 taxpayer cost, 209, 211 Financial integration, quantitative indicators, 30 First Trust Dow Jones STOXX European Select Dividend ETF, 77–78 Fiscal expansionism, 47–48 Fiscal slippage, 34–36 Fisher, Ken (interview), 175 Fisher Investments, domestic orientation, 179 Fixed-income investments, liabilities (relationship), 35 Foreign accumulated profits, repatriation, 21 Foreign capital inflows increase, 31, 34 types, 35 Foreign capital influx, 139 Foreign Direct Investment (FDI) location, 39–40 stability, 35 232 Index France Germany, rapprochement, stocks, German purchase, 193–194 Free Democratic Party, majority, 170 Funds, purchase decision, 61–63 G-20, leverage cap proposal, 209 Gearing ratio, usage, 200–201 Germany export position, 145 French stock purchase, 193–194 government bond, purchase (example), 186 housing market, problems, 145–146 long-dated yield levels, convergence, 27, 30 long-term government obligations, 189 payment burden, increase, 149 separation, 200 Global capital reallocation, 19–22 Global equities markets, decrease, 201 performance, comparison, 211 Global financial system, total loss, 207 Gold currency, strength, 157 level, record, 197–198 Government debt financing, taxation contrast, 46–47 Gray-money balances, transfer, 11 Great Depression, Federal Reserve (impact), 16 Green economy, investments, 203–204 Greenspan, Alan (expansionary policies), 120 Gross domestic product (GDP) government share, 48 Gross domestic product (GDP), total tax revenue percentage, 45 Hale, David, 20 Hydro Quebec of Canada, market capitalization, 162 Income flow, 97 Index funds, benchmark tracking, 64 Inflation appearance, expectations, 195–196 impact, 184 pressure, increase, 202–203 Inflation-protected securities, allocation (establishment), 138 Influence channels, OECD study, 50–51 Interest, variation coefficient (decrease), 30 Interest rates dollar, relationship, 194–195 impact, 184 normalization, 206–207 International Monetary Fund (IMF) China dollar trade, 215 global losses, 207 Public Finances report, 211 Internet surfers, economic understanding, 177–178 Intraday liquidity, 65–67 Investments decisions, historical data, 92 opportunities, strategies, 99–107 value preservation/growth, 25 Investors, home bias, 37 iShares FTSE EPRA/NAREIT Developed Europe Index Fund, 83 iShares MSCI All Country World Index ETF database, 70–71 iShares MSCI Emerging Markets Index Fund, 72 iShares S&P Euro 350, 73 Japan, China (contrast), 156 Kondratieff waves, usage, 202 Legg Mason Value Fund, 64 Lehman bankruptcy, 176–177 Liquidation value purchase, 96 Maastricht Treaty (1992), 8, 25 impact, 54–58 requirements, 27 Mann, Catherine (interview), 191 Market, outperformance, 90–99 McKee, Bob (interview), 205 Member-state economies, divergence, 150 Merkel, Angela, 181–182 income tax lowering promise, 170 Mobius, Mark (interview), 161 Monetary authorities, role, 206 Money, allocation, 178, 215 MSCI EAFE Index, tracking, 72 MSCI World Index, benchmarking, 178–179 Multifactor strategy, 105–106 Mutual funds, selection, 65–70 Index NASDAQ consolidation, 54 National champion banks, support, 188 Negative valuation effects, combination, 37 Netherlands, capital gains treatment, 43 New Jersey, pension fund portfolio, 136 New York Stock Exchange (NYSE), initiation, 54 Obama, Barack, 181–182 expansionary policies, 120 Old Continent GDP, 126 market, 154–155 pessimism, 181–182 Old Europe countries, 57 OMX, 56 Organization for Economic Cooperation and Development (OECD), Economic Outlook, 129, 131 Passive management, 63–65 Paulson, Henry (problems), 176–177 Pension fund industry, liquidity problems, 136–137 Petrodollars, 129, 131 Political cycle, impact, 174 Portfolios strategies, 93 testing, 92–93 Price pressure, 195–196 Price-to-book ratios, 96 Price-to-cash flow ratios, 96 Price-to-earnings ratios (P/E ratios), usage, 93–95 Productivity, corporate rate rates (impact), 50–51 Rapprochement, Ravano, Emanuele (interview), 183 Real estate, ETFs, 83 Relative strength, 99 Resources, scarcity (Malthusian constraints), 203 Return on equity (ROE), 97 Risk aversion, 194 Risk indicators, 38–39 Russia, improvement, 162–163 boom-burst sequence, 165–166 Secretary of the Treasury, role, 17 Sector exposure, 82–83 233 Shiller P/E ratio, consideration, 110 Single-A industrials, basis points, 188 Single-country ETF, 80–82 Single currency, advantages, 148–149 Single-factor portfolios, 105 Single-factor strategies, 93, 99–107 Small-cap Europe, 78–79 Social welfare outlays, growth, 169 SPDR DJ STOXX 50 ETF, 74–75 S&P Emerging Europe ETF, 79–80 S&P European Emerging BMI Capped Index, 79–80 Stability Pact, 36 Standard deviation, decrease, 30 Stock market evolution, 53 impact, 177 macro efficiency/micro efficiency, 62–63 Stocks indexes, decrease, 142–143 ownership representation, position, 215 purchase decision, 61–63 relative performance, indicators, Systemic implosion, risk, 150–151 Target currencies, difficulties, 10–11 Taxation government debt financing, contrast, 46–47 policies, impact, 49–50 regional comparison, 45–46 Technology, investment, 172–173 Total assets world equity funds, total assets equity funds (ratio), 117–118 Trade flows, changes, 126, 129 Treasury Inflation-Protected Securities (TIPS), 18, 195–196 United Kingdom, problems, 147 United Nations Conference on Trade and Development (UNCTAD), Division on Investment and Enterprise (study), 39 United States assets monetary influx, 197 quality, 31 bond market, Eurozone bond market (contrast), 185 234 Index United States (continued) challenges, 38–40 companies economy, decoupling, 172 global participation, 47–48 deficit, structural correction, 196 economic dynamism, 143 economy, balance sheet recession, 151 Europe, contrast, 36–40 exchanges, dominance, 59 federal taxation, 41–42 foreign policy, Asian dislike, 154 framework, 26–33 health care benefits, 170 imports, decrease, 196 leverage amount, 200–201 position, 212–213 market European market, contrast, 58–59 integration, 30–31 national debt, change, 213 policies, change, 34–35 private sector debt, decrease, 213 public sector debt, increase, 213 retirement benefits, 170 short-term securities, sale, 115 state taxation, 42–43 stock indexes, valuation, 173 tax code changes, impact, 21 trade deficit, decrease, 196 Treasuries, China holdings (shortening), 214 United States dollar balances, demand, 21 decrease, 193 demand/supply, 194–195 depreciation, 137–138 Euro, competition, 148 weakness, impact, 136 weak phases, identification, 123 Valuation, 109 Value-added tax (VAT), impact, 45 Vanguard Emerging Markets ETF, 72 Vanguard European Stock ETF, 73 Vanguard Total Market ETF, 67 Weighted indexes, 76 Western Europe, annual personal consumption (change), 20 World Bond Market Cap, 200 World Equity Market Cap, 200 Yardeni, Edward (interview), 169 Yield curve movement, 186–187 shape, 185–186 slope, economic activity indicator, 186 Zulauf, Felix (interview), 141 PRAISE FOR INVEST IN EUROPE NOW! “For over thirty years, David has introduced many investors to global interdependence issues through his newsletter and his educational and enjoyable trips to Europe as well as the rest of the global investment scene In this book, long overdue, David and Vincenzo guide both the novice and the experienced investor on the journey of careful investing in Europe In this book, David and Vincenzo guide the fundamentals of economic competitiveness, currency volatility, and tax considerations This book should be the first book for the investor truly interested in proper due diligence before the first dollar is spent.” —JOHN E SILVIA, Chief Economist, Wells Fargo “David Kotok is that rarest of creatures on Wall Street: objective, creative, unemotional, intelligent, and curious His kind visage appears too infrequently on business television, where he is a rare breath of sanity amongst the professional hucksters and charlatans If Kotok says you should look closely at Europe as an investment option, well then, you best drop everything else and look more closely at Europe!” —BARRY RITHOLTZ, author, Bailout Nation, and Creator/Writer, The Big Picture “An excellent read and a must for investors Political and economic climate changes are creating substantial global investment opportunities but also minefields Kotok and Sciarretta clearly identify the forces that will shape investment returns in the years to come and provide tools and a strategic framework to help the investor navigate through the complex investment landscape.” —DR WILLIAM C DUNKELBERG, Professor of Economics and former dean, Fox School of Business, Temple University, and Chief Economist, National Federation of Independent Business “Kotok and Sciarretta pose a profound challenge to the conventional wisdom, that says the dollar will remain the dominant reserve currency of the world Whether or not the EU outperforms the U.S economy as they suggest, the mere fact that credible observers are thinking about such possibilities represents a revolutionary, potentially destabilizing trend for the United States Global investors must consider their arguments carefully.” —CHRISTOPHER WHALEN, Cofounder, Institutional Risk Analytics “Kotok and Sciarretta’s volume provides a crucial view of the U.S.-EU competition for economic and financial preeminence in the post–credit crisis world As the U.S adopts more liberal democratic institutions, the EU’s shift away from those same principles creates the potential for a crossing point in economic and financial preeminence The volume is therefore a valuable starting point for viewing the dynamics of the potential shifts in global hegemony and investing accordingly.” —DR JOSEPH R MASON, Hermann Moyse, Jr./Louisiana Bankers Association Endowed Professor of Banking, Louisiana State University; Senior Fellow, The Wharton School; and Partner, Empiris LLC Includes interviews with today’s leading market gurus: William Clark • Felix Zulauf • Marc Faber • Mark Mobius • Ed Yardeni Ken Fisher Emanuele Ravano Catherine Mann Franỗois-Xavier Chevallier • Bob McKee ... Kotok, David Invest in Europe now! : why Europe s markets will outperform the US in the coming years / David Kotok, Vincenzo Sciarretta p cm Includes bibliographical references and index ISBN 978-0-470-54701-4... Invest in Europe Now! WHY EUROPE S MARKETS WILL OUTPERFORM THE U.S IN THE COMING YEARS David R Kotok Vincenzo Sciarretta John Wiley & Sons, Inc Copyright © 2010 by David Kotok and Vincenzo... attractive option for investing in Europe The reader is then equipped to conquer the more technically oriented second part of the book This is a mustread for any investor interested in the EU It offers