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How to Play the Breakout in European Stocks

(00:08):
Hi everyone. I’m Tim Melvin. And welcome back to A Better Way to Wealth. Now, late last month, we saw something that we have not seen in the world in 21 years, according to Bank of America’s research department, the Euro Stoxx 600 index finally, for the first time since 2000, broke over those 2000 highs. Now the indexes have tried to rally above this 3 times during the last 21 years. Once was in July of 2007, they approached the 2000 high, sellers came into the market. We got into the global financial crisis and the market pulled right back. In April 2015, Once again, the European markets attempted to break above those highs. Sellers came back into the markets, pushed the index back down. Then the third and final time they tried and failed was in February of 2020. Just when it looked like the global economy was going to get its act together and roar and Europe was going to pick up the pace, we got hit with COVID and nothing roared under COVID. Eurozone stocks fell dramatically, pushing back from those highs.

(01:25):
So for the third time, they had tried to break above highs last set in the year 2000. That was a long time ago in stock market terms, my friends. So last week, last month, they finally surpassed those highs for the very first time in 21 years. Now, Bank of America research analysts, they put some data together and they think that based on valuations, the Eurozone markets and the United Kingdom markets could appreciate by as much as another 50%. I think they’re really low. And here’s why I say that. When you look at the US markets, we had the same kind of experience. We didn’t break above those highs. We took a run at it in 2007. We tried to get over those highs again. Great financial crisis. We fell back. We didn’t. But then in 2013, we broke above those highs and never looked back.

(02:24):
The market has almost tripled since moving through the year 2000 highs. If the experience in Europe is anything like the experience here in the US, we could have a lot of upside now based on valuation. I think that’s even more true. European markets are dramatically undervalued when you compare them to the United States. If we accept the low interest rate justifies higher valuations arguments, then Europe is deeply undervalued at this point in time. US markets are trading with a 10-year CAPE PE ratio of about 36 right now. European markets traded 26 with the cheapest market, the United Kingdom at just 17 times 10 year average earnings. So there’s a lot of upside left in United Kingdom and Eurozone stocks as they move through those year 2000 highs and into new all-time highs. So when we look at this, those markets are much cheaper.

(03:27):
They’ve just broken a new highs. That’s generally a pretty good time to get involved with the markets. You can a couple of ways to play this. You can get involved with the exchange traded funds the Eurozone ETFs there’s Ishares Europe, that’s IEUR. There’s the SPDR Euro Stocks 50, that has the rather entertaining ticker of FEZ. Not quite sure how that came about. You could get into some single country funds. Said the United Kingdom, some cheapest market over there by a pretty comfortable margin. The Ishares United Kingdom Fund is EWU. That looks very attractive at current levels. Or Italy, EWI. Italy’s always a fun market because the economy is something of a disaster zone. But if we get money flowing from large institutions into European stocks, Euro Italian indexes will get a lift as well.

(04:16):
Look, the European Central Bank is committed to keeping rates low enough to keep economic activity stimulated until we once and truly are past the COVID pandemic crisis that put Europe on such a lock down a year ago. Now Europe has had another wave of the virus, just like we have. It’s the Delta variant that they dealt with. The same thing hit the United Kingdom really hard, but there’s a lot of signs that the variant outbreak is slowing over there ahead of the UK of the United States. And hopefully we find something of the exact same trajectory. They will keep rates where they need to be for as long as they need to do it. They are committed to supporting the European economy. And of course, the Bank of England, the same thing there in the United Kingdom, until the pandemic is over and economies can really fully open back up again.

(05:13):
So we’re going to have low interest rates that should help the Eurozone stocks continue to move higher. Inflation is a problem, but not as big a problem as we have here in the United States. So I think there is some upside in European markets. And again, you can play it with the exchange traded funds. That’s not a bad call, or you can come back tomorrow and find a better way to take advantage of the breakout to new highs in European stocks, using some of my strategies that we’ve worked on here in the United States for decades, that we can also use on European stocks. So I’m Tim Melvin, that’s A Better Way to Wealth, and I’ll see you tomorrow.