4 Contrarian Plays on Europe

08/13/2015 10:00 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

I can’t remember a time over the two decades when analysts were so negative on European stocks, observes global expert Yiannis Mostrous, editor of Capitalist Times.

European corporate earnings have languished for the past five years; if our outlook for improving economic growth in the EuroZone materializes, earnings should also tick up and so should returns on equity.

Accordingly, we prefer to focus on names that offer the most leverage to a strengthening economy. Names with strong balance sheets and surplus cash flow will be best-positioned to take on leverage and accelerate their growth.

A shotgun approach to investing in Europe involves ETFs, like the Deutsche X-trackers MSCI Germany Hedged Equity (DBGR), which provides exposure to German equities while mitigating exposure to fluctuations in currency exchange rates.

The exchange-traded fund offers exposure to some of our favorite German stocks and distributes its net realized gains, if there are any, to shareholders every six months.

Deutsche X-trackers MSCI Europe Hedged Equity (DBEU) offers exposure to European equities and hedges its exposure to the euro, the British pound, and the Swiss franc. The ETF distributes any net realized gains on an annual basis.

The rifle approach involves selecting top stocks. For example, we remain bullish on longtime favorite ING Groep (NA: INGA; NY: ING), which has almost completed a comprehensive restructuring that aims to simplify its operations and refocus on the company’s core strengths.

The effort began four years ago, when the company announced plans to dispose of its sprawling insurance operations. This process will transform the company into a pure retail and commercial bank at the end of 2016.

ING’s turnaround story has played out as we expected; management continues to make all the right moves in its push to build a foundation for smart growth while repaying money borrowed from the Dutch government.

With annual revenue of more than EUR70 billion, Siemens (DE: SIE) is one of the world’s largest industrial conglomerates and remains one of our top plays on a European economic recovery.

The company focuses on four sectors—energy (primarily power generation), healthcare, industry, and infrastructure and cities—but also pursues opportunities in financial services and other areas.

Siemens’ stock—yielding 3.5%—has lagged this year and trades at a discount to its peers. However, the shares have priced in the worst-case scenario and don’t reflect management’s renewed commitment to returning capital to shareholders.

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