~CHAPTER 10: CONSUMPTION AND SAVINGS~
Link to Article: http://www.thestar.com/business/personal_finance/investing/2013/11/18/europes_recovery_offers_mutual_fund_opportunity.html
Europe’s recovery offers mutual fund opportunity
After five years of recession, European share prices are waking up. By: Rudy Luukko Mutual Funds Columnist, Published on Mon Nov 18 2013
For Canadian mutual fund investors, Europe is the forgotten continent. Among the several thousand funds available here only about 30 fall into the European stock category and of these, many have assets of less than $50 million, making them candidates to be shut down. Among the 300 exchange-traded funds not a single one is dedicated exclusively to Europe. As so often happens, out-of-favour markets can produce pleasant surprises. So it is with Europe. Through the end of October, the median year-to-date return of European equity funds was 22.8 per cent. As a group, these funds are on track for their best calendar year since 2006. By comparison, emerging markets funds - investing in countries with much more robust growth rates - have had a disappointing year-to-date median return of only 3.1 per cent. European stock markets are responding positively to an improving economic outlook. Real growth in gross domestic product is expected to be flat for 2013, according to the European Commission, but after that better days lie ahead. Real GDP growth (after inflation) is forecast to be 1.4 per cent next year and 1.9 per cent in 2015. Recent trends in purchase orders are also encouraging. The Market Eurozone Purchasing Managers Composite Output Index, which measures activity in the countries that use the euro, was positive in October for the fourth month in a row. Unemployment remains worrisome at an average of around 11 per cent for the European Union countries, which include the United Kingdom. Worst off are workers in Greece and Spain, which each have a jobless rate of more than 25 per cent. Another sobering thought is that since European stocks having enjoyed a big rebound, future gains will be harder to come by. The expected recovery from the hard times of 2008-2009 is already largely reflected in stock prices. Dominic Wallington, portfolio manager of the $2.9-billion RBC European Equity, which is by far the largest of its kind in Canada, doesn’t expect to see this year’s gains repeated in 2014. Even so, Wallington remains optimistic because valuations of the European stocks, according to his firm’s analysis, are relatively cheap. As evidence, Wallington cites the “trend” price-earnings ratio, which is adjusted to smooth out the impact of market cycles. Europe’s trend P/E ratio, he says, is currently 9.2, much cheaper than the historical average of about 13. Stock prices are driven mainly by their growth in revenues and earnings, rather than by the big economic picture. “It’s the companies we need to focus on,” says the London-based Wallington, who is chief investment officer of RBC Asset Management U.K. Ltd. “We’re constantly looking for the best brands and the highest-return businesses.” For Canadians, the strongest argument for investing in Europe is diversification. World-class European businesses like the consumer-staples giant Nestlé and the luxury beverage-maker Diageo, to name only two, have no Canadian equivalents. Nor do you need to invest specifically in a European equity fund. In fact, most investors don’t, since more geographically diverse funds will do the job nicely. Global equity funds, and especially those in the international equity category, generally have healthy helpings of European stocks. About two-thirds of the market capitalization of the world’s developed overseas markets consists of companies based in Europe. Though the so-called Old World has economic aches and pains, that’s no reason for Europe to be a no-go zone for you as an investor. Performance-wise, shares of European companies haves shown they’re perfectly capable of having a youthful spring in their step. |
The article about Europe offering several mutual fund opportunities due to its recovery relates with "Chapter 10: Consumption and Savings." Since Europe is such a big country, many businesses purchase products from European businesses, also known as consumption. On the other hand, if businesses did not want to purchase their products due to high prices, for example, then that would be their savings. In order to have an idea of what their expected income and expenditures are, they went into budgeting. Europe's funds have been doing very well since 2006. As well, businesses have the opportunity to possibly pay later with a credit card while obtaining their goods now.
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