Look for these European Stocks to Exert a Lot of Horsepower

The Wall Street Journal recently published an article, “Emerging Europe is a Haven in Selloff,” highlighting the region’s recent success in “rising above the storm” that other developing markets have not been able to avoid.

Dark clouds have been swirling around emerging markets, with the MSCI Emerging Markets Index falling about 12 percent on a year-to-date basis.

We’ve been expecting a bounce in Europe’s emerging markets for some time now. In theInvestor Alerta few weeks ago, we talked about how the area has lagged over the past five years. Since July 2008, the MSCI Emerging Market Eastern Europe Index has persistently underperformed the overall emerging market index.

Emerging Europe Lagged Global Emerging Markets Last 5 Years

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This underperformance happened seemingly through no fault of their own. As we’ve discussed,Eastern Europe has been an area of strength, with a rising middle class, low unemployment and a relatively strong economy. Rather, companies in these countries have suffered “guilt by association” due to their proximity to their Western neighbors.

Eastern Europe is very export dependent on developed Europe. More than 80 percent of Czech and Hungarian exports and about 50 percent of Polish and Turkish goods head to Western Europe.

So with economic data in Europe turning positive, many investors including our team are “betting that Western Europe's return to growth after a year-and-a-half-long recession will fuel demand for cars, appliances and other goods manufactured in Eastern Europe,” says the WSJ.

This could be a powerful engine to set emerging Europe on a huge upward trajectory, closing the performance gap and even outperforming its peers.

Additional research suggests stocks in emerging Europe could exert even more horsepower.

According to Bank of America Merrill Lynch, stocks in the European Union area historically outperformed when U.S. interest rates rose. Over the last 40 years during periods of rising rates in the U.S., European stocks took a hit up to six months prior to the Federal Reserve raising rates. However, six and 12 months after the Fed began its rate increases, European equities have taken off.

European Equities Outperformed When Fed Raises Rates

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With the likelihood for rising rates and an improving Europe in our future, this research makes a strong case that emerging European companies will be experiencing a “growth by association.” We believe the Emerging Europe Fund (EUROX) is poised to benefit.Find out why.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

By investing in a specific geographic region, a regional fund’s returns and share price may be more volatile than those of a less concentrated portfolio. Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.

The Emerging Europe Fund invests more than 25% of its investments in companies principally engaged in the oil & gas or banking industries. The risk of concentrating investments in this group of industries will make the fund more susceptible to risk in these industries than funds which do not concentrate their investments in an industry and may make the fund’s performance more volatile.

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The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The MSCI Emerging Markets Eastern European Index (Russia at 30 percent market-cap weighted) is a capitalization-weighted index that monitors the performance of emerging market stocks from all countries that make up the Eastern European Region.

© U.S. Global Investors


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