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Europe: The Monster Still Lurking Under the Bed

There is a lot of focus on earnings right now, as well as continued interest in the upcoming debt ceiling debate. But investors would do well to remember the mess that exists in Europe and how that could continue to hold back global growth.

I know, I know, you’re sick of Europe talk. We all are. But that’s no excuse to ignore the important trends there and what it means for a number of specific multinational blue chips and global capital markets in general.

Here’s a rundown in a palatable format, even if the data might upset your stomach:

Negative Growth Forecasts for 2013: Goldman Sachs (NYSE:GS) published its outlook for growth in the eurozone to start the year, and according to Alphaville, it ain’t pretty. After a 0.4% decline in calendar year 2012, GS is predicting another 0.2% decline in 2013. The “best” country in its book is the U.K. with 1.4% growth. But Italy and Spain are markedly in the red at -0.8% and -1.7%, respectively.

EU Manufacturing Sucks: Looking at the Markit purchasing managers’ index for the eurozone, the industry remains soundly in contraction mode. Even the “good” news in Markit’s latest report is pretty ugly. Consider Spain’s PMI is at a nine-month high … except it remains below 44, and you need a reading of 50 or higher to signal growth. Italy is at an 11-month high, but remains at 45.7. In short, the hole remains mighty deep, and European manufacturing isn’t climbing out anytime soon.

ETFs Signal Europe is Overbought: But what about that big run in some country-based ETFs across 2012? Like the the 30% added by the iShares MSCI Germany Index Fund ETF (NYSE:EWG) or the 21% added by the iShares MSCI France Index Fund ETF (NYSE:EWQ)? Well, take a look at this analysis from Bespoke that shows big divergence from 50-day moving averages and thus raising questions of whether some mean reversion is in the works. (Of course, Bespoke thinks the entire world is overbought, so why just pick on Europe?)

Plain Old Fatigue: Like you, many investors are just tired of Europe and trying to trade it. Thus, volume has slumped to a decade-low level. This naturally increases the likelihood of volatility on thin trading, but also speaks a lot about the lack of optimism.

You might think you can avoid this hangover by sticking to the S&P 500. But remember that Europe was a favorite whipping boy for many multinational stocks last year when they missed earnings. Exhibit A: The European car market is at its lowest level in two decades; General Motors (NYSE:GM), Ford (NYSE:F) and other automakers have only been saved by boffo U.S. sales. Exhibit B: A weak holiday season hit many EU retail sales hard, and multinationals like Nike (NYSE:NKE) or Ralph Lauren (NYSE:RL) with a big presence there are increasingly reliant on America or China to offset trouble in Europe.

So don’t forget about the EU. Yes, the debt crisis and political shenanigans there are hard to follow — especially considering our own domestic drama. But ignoring these big trends could be toxic to your portfolio.

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Jeff Reeves is the editor of and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

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