Hopes of economic recovery in Europe received another jolt last
week. Eurozone, the 18 nation bloc that comprises some of the
behemoths, saw its second quarter GDP growth stagnating. This comes
along with a 0.2% contraction in Germany's economy and Italy
sliding into recession. The dismal data comes at a time when
Europe's banking sector concerns have intensified following the
crisis surrounding Portugal's banking giant Banco Espírito Santo.
The zone's manufacturing activity has also been choppy. Evidently,
the economic recovery is losing momentum fast. In any case, it is
debatable whether a recovery began at all.
Amid this, staying away from certain low-ranked European funds will
be a prudent move. We will pick 3 such funds that carry unfavorable
Zacks Rank as well. Before we discuss these funds, let's dig deeper
into the GDP numbers and Europe's economic woes.
Eurozone Sees Zero Growth; Germany Contracts, Italy Slips
According to the European Union's Statistics Office, Eurozone
economic growth stalled in the second quarter. The zero growth
reported by Eurostat was in contrary to expectations of a 0.1%
growth. GDP had increased 0.2% in the Eurozone in the first
quarter. Eurozone's $13 trillion economy contributes 17% of the
global gross domestic product.
The powerhouse Germany saw a surprise dip in its GDP - the first
one in over 12 months. Germany's Federal Statistics Office reported
a 0.2% contraction in the second quarter. The economic contraction
between April and June compared unfavorably to expectations of zero
growth. The Statistics Office also revised down first quarter
numbers to 0.7% from 0.8%. Nonetheless, the second quarter
contraction is a lot to worry about when juxtaposed against first
quarter numbers. It was also reported separately that Germany's
inflation dropped to the lowest since Feb 2010, at 0.8%.
The surprising Germany contraction was largely an outcome of high
level of trade deficit. Declining investments, more so in the
construction sector, dragged the GDP to the red.
Eurozone's third-largest economy, Italy slipped into recession
after its GDP shrank 0.2% in the second quarter. A Reuters poll had
been expecting a 0.2% gain. This was the third instance that Italy
slid into recession since 2008. Prime Minister Matteo Renzi now
faces severe pressure to implement the structural reforms.
"Growth Broken Down" in France
France, which along with Germany, contributes 66% of the bloc's GDP
saw zero growth in the second quarter. France's Finance Minister
Michel Sapin said "growth has broken down, in Europe and in
France". The nation also chopped its 2014 and 2015 growth forecasts
and said it will fail to meet the deficit targets this year.
National statistics office INSEE reported zero growth in the second
quarter, mirroring the flat growth also recorded in the first
quarter. This makes things difficult for the nation to achieve a 1%
growth. French government halved its 2014 growth projection of 1%.
The 1.7% forecast for 2015 was also shunned.
As for a trade deficit target, it is unlikely that France would
bring the deficit down to 3% by year end, as it had promised to the
EU. The sluggish growth and "insufficient inflation" will keep
France away from meeting public deficit target in spite of spending
control. Sapin said that France will cut its deficit "at an
appropriate pace", and revised France's public deficit up to over
4% of GDP this year.
France Blames ECB of Foot-Dragging
Meanwhile, Sapin has blamed the European Central Bank (ECB) for
France's failure to meet the deficit target. Speaking to Europe 1
radio, Sapin said: "We must adapt the pace of deficit reduction to
the exceptional situation ... of growth that is too weak everywhere
in Europe and the exceptional situation of inflation that is too
weak across Europe".
Sapin has also urged ECB to be more active to offset deflation
threats and to boost growth. Sapin said that the region requires
monetary policy "adapted to the exceptional situation of weak
growth and weak inflation across the euro zone".
Surviving "External Shocks"
Every quarter of near-zero growth in Eurozone exposes its
vulnerabilities. The region has been subjected to a weak banking
system, disappointing manufacturing activity and a dismal labor
force. In addition, the geopolitical concerns, considered as
"external shocks", make the situation murkier.
For instance, the Russia-Ukraine crisis is far from resolved. The
ensuing standoff with the greater part of the international
community has led to many sanctions. These sanctions affect not
just Russia's business, but they do hamper the trade relations a
great deal. A recent example is Russia's food import ban in
retaliation to the widening of sanctions by the European Union and
New sanctions restrict Russia's largest banks from raising finances
in European Union and place a trade bar on arms. In response,
Russia has banned a wide range of food items, ranging from fruits
and vegetables to meat and poultry. This ban will hurt European
fruit and vegetables markets heavily. This is because Russia is the
biggest importer of European fruits and vegetables. However, the
recent figures from Eurostat excludes the period of the
deteriorating ties between EU and Russia.
The slowdown in global trade and improved business for emerging
markets are an add-on to the plight of European exports.
Portugal's Banking Woes
Last month, Portugal's Espirito Santo International, which is the
biggest shareholder in Banco Espirito Santo (BES), halted trading
of its shares and bonds as the parent company Espirito Santo
International (ESI) allegedly defaulted on a debt payment. It was
also accused of accounting discrepancies.
Also, BES, one of the biggest banks in Portugal, had incurred a
loss of €3.58 billion in first half of 2014 - the biggest loss in
Portuguese banking history. The central bank announced it will
split BES into a "good bank" and a "bad bank." The 'good bank' will
receive a bailout of €4.9 billion from the bank resolution fund.
Out of this, €4.4 billion will be provided by the Portuguese
government as a loan and the rest as cash.
The "good bank" will be called Novo Banco. BES' potential assets
such as deposits and loans, which can be repaid, will accrue to the
"good bank." BES will become the "bad bank." The "problem" assets
of the bank will remain with BES. Shareholders and the creditors
will be liable for these assets and may lose all of their
investments. The Espírito Santo Financial Group, which is one of
the owners of BES, and Crédit Agricole (one of the biggest French
lenders) are among those which stand to lose.
Meanwhile, The ECB has decided to create a unified watchdog for all
Eurozone banks before the end of the year. All the 28 members of
the EU will also undergo stress tests to determine how they would
respond to another economic slowdown and a slump in the markets.
Stress Tests Ahead: 3 EU Banking Picks
3 European Funds to Sell Now
Here we will suggest three Zacks Mutual Fund Rank #4 (Sell) or
Zacks Mutual Fund Rank #5 (Strong Sell) Europe - Equity funds that
should be offloaded from portfolios. Remember, the goal of the
Zacks Mutual Fund Rank is to guide investors to identify potential
winners and losers. Unlike most of the fund-rating systems, the
Zacks Mutual Fund Rank is not just focused on past performance, but
the likely future success of the fund.
US Global Investors Emerging Europe
(EUROX) seeks capital appreciation over the long term. The fund
invests a lion's share of its assets in equities and related
securities of companies in emerging markets of East Europe.
The non-diversified fund has returned a negative 10.8% year to
date. EUROX currently carries a Zacks Mutual Fund Rank #4 (Sell).
ING Russia A
(LETRX) invests primarily in equities of Russian companies. A
minimum of 80% of its assets are invested in Russian companies,
while the remaining 20% goes into debt securities that are issued
either by Russian firms or Russian government.
The non-diversified fund has returned a negative 13.4% year to
date. LETRX currently carries a Zacks Mutual Fund Rank #5 (Strong
Franklin Mutual European C
(TEURX) seeks growth of capital. The fund invests most of its
assets in those European firms whose market prices are believed to
be lower than the intrinsic value. The fund generally invests in
companies from five countries, but may also chose to invest its
assets in one country. The fund may invest a maximum of 20% of its
assets in securities issued by the US, Middle East or other
The non-diversified fund has returned a negative 5% year to date.
TEURX currently carries a Zacks Mutual Fund Rank #5 (Strong Sell).
To view the Zacks Rank and past performance of all Europe -
Equity funds, investors can
click here to see the complete list of Europe -
Equity of funds
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