Europe Enjoys a Honeymoon

08/05/2010 11:37 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

Memo to the Euro-trashers who just knew those funny-money socialists were doomed: The MSCI Europe Financials Sector Index Fund (Nasdaq: EUFN) is up 27% in five weeks.

The austere, endangered euro has rebounded 10% in two months against the no-longer-giddy greenback.

The German unemployment rate of 7.6% for July was the lowest in almost two years and nearly two percentage points below the US rate.

Taking a slightly longer view, Greek stocks are up 25% in dollar terms over the last three months and Spanish equities have returned 27%, versus the 3% bump for US large caps and midcaps, according MSCI Barra.

European manufacturers are cranking out exports faster than before.

And many of the top continental banks are back in black as loan-loss provisions wane.

Investors serially spooked with visions of a riotous and bankrupt Europe expected anything but this. Many will stay on the sidelines waiting for a relapse, or that headline proclaiming that all is well and it's perfectly safe to get back in.

Barring such an announcement, the more intrepid sort have been buying into the cheapest of the emerging markets. Turkey leads the pack with an 18% gain over the last three months in dollar terms. Colombia has returned 20% over the same span to pace Latin America. Divided Thailand and the perpetually menaced South Korea have been top dogs in Asia since early May with dollar returns above 11% (all according to MSCI Barra). The buyers seem to believe that politics won't hold any of these markets back any more than it already has.

China's cheap too, at less than 13x projected earnings, though these probably don't assume a real-estate crash. Neither does perhaps the brassiest of China's billionaires.

But just to be safe, Beijing is reportedly telling its banks to stress-test for a 60% drop in home prices.

Is there another nasty surprise lurking out there somewhere? No doubt. Europe is living through something of a honeymoon period now that credit fears have eased, even though many of the painful spending cuts promised to lure back bond buyers have yet to materialize.

Meanwhile, growth across North America is slowing, while Japan continues to pay the price for an overpriced yen.  

Then too, emerging-markets booms like the one that's propping up the Western manufacturers have a way of going astray. Inflation is already a big political issue in India. Another global growth engine, Brazil, may be relapsing into some bad old habits.

There are certainly enough risks around to keep investors worried. The question is whether these will be enough to keep them in government bonds at derisory rates.

Notwithstanding Canada's good fortune and still low rates, Gordon Pape takes the Bank of Canada to task for its latest rate increase. Perhaps the bank was anticipating crude's push past $80 a barrel? That number works well for the best Canadian oil sands miners, writes Roger Conrad in recommending two such plays. Chile's Corpbanca got Carla Pasternak's attention with excellent growth prospects and a 6.6% yield.

Yields like these in markets as attractive as Chile's seem likely to decline by virtue of higher share prices. And when they're hardly worth the bother any more, expect the headlines to turn super-sunny.

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