When Brexit (the British exit from the European Union) was announced in mid-2016, investors got understandably concerned; as a result, the pound plummeted against the U.S. dollar. While there were still numerous details to be worked out around the United Kingdom's departure from the EU, the news was just one more worrisome event in Europe over the past several years. Many investors began to ask: "Do European investments still have a place in my portfolio?"
Strategists from Wells Fargo Investment Institute say the answer is yes. Paul Christopher, Head Global Market Strategist, and Sean Lynch, Co-Head of Global Equity Strategy, traveled to Europe in late 2016 to meet with corporate leaders, government officials, and financial analysts. Their take: Europe is still at the beginning of a slow economic and earnings recovery.
Slow and steady
"Some financial problems still persist overseas, so investors may need to approach European investments cautiously," says Christopher. "However, investors who can be patient and wait for longer-term results may be rewarded with some promising opportunities."
Here Christopher and Lynch highlight some important things to know about Europe and its possible ongoing role in your investment strategy:
Expect volatility on the domestic horizon
The past two years have seen wide swings in nearly all the financial markets, and U.S. investors could face additional instability in the years ahead. The swearing-in of a new U.S. president, for instance, may usher in some unpredictable economic changes, says Christopher.
This is one reason 2017 may be a good time to think globally for your investment portfolio more than you have in the past, he adds. Investing in companies that are based in Europe or that serve significant overseas populations could offer some good investment prospects, he says.
Look beyond the headlines
It's easy to focus just on the negative news from Europe. However, Lynch points out that the United States has had its own share of economic challenges. Even so, investors did not feel compelled to withdraw completely from U.S. equities and bonds.
The same is true of Europe, he says. Consider continuing to reserve a place for European investments in your holdings. And keep in mind that initial negatives in any economy can turn into positives. For example, while immigration issues in some European countries initially have proven difficult — finding homes and new jobs for incoming immigrants, for instance — population increases could eventually lead to positive changes in public services and even consumer spending.
"Investors who can be patient and wait for longer-term results may be rewarded with some promising opportunities." — Paul Christopher, Head Global Market Strategist, Wells Fargo Investment Institute
Consider Europe as a whole
Individual issues facing different European countries, including unemployment, immigration, and economic disparities between various industry sectors, aren't completely resolved, Lynch says. "However, we have been pleasantly surprised to see that many European companies are showing gradual improvements in earnings," adds Lynch. "That's a very positive marker."
The key, in Lynch’s opinion, is to consider broadly diversified European investments. He also believes investors should not try to target a particular country they think will experience the most robust recovery. Doing so would be highly speculative, he says.
European dividends can generally be generous
"In general, European stock dividends tend to be higher-yielding than similar U.S. investments and more broadly diversified," says Lynch. Some of that is a difference in corporate culture; European companies have a history of paying more substantial yields than U.S. companies.
"If you've already made money in U.S. stocks and are ready to reallocate some of your earnings into new investments, talk to your relationship manager about the possible role of higher-dividend-paying European investments," notes Christopher. Dividend-paying stocks can be especially helpful for those who need a steady influx of income.
Now may be the time to consider investing in Europe
As with any update in your investment strategy, you may not want to make any dramatic shifts. European holdings are no exception. Attempting to time the market is a challenge, even for the most seasoned portfolio managers.
However, Christopher does recommend looking at Europe in the very near future. "There may be some early gains available now and in the coming months, while other investors are looking in other directions, that won't be available later," he notes.