After six quarters in a row of economic contraction, the Eurozone Gross Domestic Product (GDP) grew at an annualized rate of 1.1% for the second quarter of 2013. This growth rate is too slow to reduce the 12.1% unemployment rate across the continent, but long changes in direction always begin with the first turn and the first step. The economies of southern Europe have not turned positive, but the rate of contraction is slowing considerably.
The Stoxx Europe 600 Banks Index is up over 30% in the past twelve months, reflecting a recovery in Europe’s financial sector. Believe it or not, even Banco Santander SA in Spain is reporting strong gains in earnings.
We like the opportunity now to invest in Europe’s large multi-national companies that have significant sales beyond Europe. Many large European companies have had their stock prices punished because they are headquartered in Europe even though their sales are significantly global. We are also fond of Europe because we can invest there at a 25% valuation discount compared to what we pay for earnings in the USA.
Small and mid-size companies in the U.S. are showing better momentum now than large U.S. companies, so we are finding that small and mid-cap U.S. investments combined with large, multi-national European companies create diversified portfolios with good current momentum for growth.