Europe Stock Market ETFs Defy Recession; Here's Why


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European stock markets have scaled to new heights despite record unemployment and the longest recession in eurozone history, with no end in sight.

It shows that stock market growth has little correlation with economic growth.

Investors trading on fundamentals instead of technicals are missing a roaring bull market that contrarians dream of.Global X FTSE Greece 20 ETF ( GREK ), tracking the most beleaguered EU country, soared 31% in the trailing month. It has doubled in the past year.

Vanguard FTSE Europe ( VGK ), the largest ETF by assets tracking the Continent, surged 5% the past four weeks and 27% over the past 52 weeks. It closed down slightly on Thursday at 52.14, near its recent two-year peak. The SPDR S&P 500 ( SPY ) climbed 5% and 24% over those periods.

IShares MSCI EMU ETF ( EZU ), with nearly 250 stocks based in the 17-nation bloc, posted similar returns as VGK.

ETFs ofGermany ( EWG ),France (EWQ), theUnited Kingdom (EWU),Belgium (EWK), theNetherlands (EWN),Switzerland (EWL),Ireland (EIRL),Turkey (TUR) and the Nordic region (GXF) are trading at or near 52-week highs and posted double-digit returns the past year. Even the few that are trading below 52-week highs --Spain (EWP),Italy (EWI) andAustria (EWO)-- have corrected only 4% to 8%.

Up There Regardless

European stock markets are defying gravity on hopes the dire economic news will prompt the European Central Bank to beef up monetary stimulus by lowering interest rates. That would push more money into the banking system and force banks to lend, investment strategists say.

"So in a way, bad news on the economy is good news for stocks," said Alec Young, global equity strategist at S&P Capital IQ. A risk is that the strengthening dollar will dampen returns made in a weaker currency for U.S. investors.

Major central banks around the world, especially Japan's, are "creating capital out of thin air, and all investment capital right now is searching out its highest return as opposed to return of capital," Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, said in an email. "Clearly, some of this capital is working its way into Europe, particularly the peripheral bond markets and European equities."

Stock markets tend to look ahead and emerge from bear markets months before the economy recovers. "By the time GDP figures are released and then often significantly revised, the underlying data is well-known and largely factored into the market," Bill Witherell, chief global economist at Cumberland Advisors, said in an email. He believes GDP growth will return in the second half of 2014.

European stocks trade at attractive valuations, Witherell adds. While U.S. indexes rally to fresh historic highs, Europe ETFs still trade well below their 2008 and 2011 zeniths and have more room to play catch-up.

Exporters could benefit from a weakening euro, which makes their products more competitive abroad. "Luckily for European companies, robust revenue growth in overseas markets offset the weakness of domestic sales," Ned Davis Research Group wrote in a strategy note.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
More Headlines for: EWG , EZU , GREK , SPY , VGK

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