Research & Advice

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Eurozone & UK the Most Attractive Global Regions

The current buzzword for the Chinese economy is “overheated”.  For Japan, they are still trying to build economic traction.  The U.S. is losing traction and slipping into below-trend growth.  Emerging markets have been doing fine, but each tends to be non-diverse in their economies.

The Eurozone and the U.K., for global portfolios, deserve to hold over-weighted allocations.  Europe’s economy may cool ever-so-slightly in 2008, but this year it is likely to match the fastest growth rates seen since the late 1990s boom.  Look for 2007 to post economic growth gains of about 2.7 percent, which would mark its third successive year of above-trend performance. 

The unemployment rate should drop below 7 percent (good for the region) this year and then further improve in 2008 as European countries are on track to have added 9 million jobs during the 2006-2008 time periods. 

Consumer demand has been healthy and can likely help the economy grow beyond 2008 as inflation is likely to remains contained.  The only signification inflation problem seems to be oil prices, which have logically picked up with the continuation of the cyclical recovery.  The European Central Bank targets an annual inflation rate of slightly below 2 percent.  It stands now and is forecasted to be around 1.9%, so the ECB has been effective at doing its job.

Valuation-wise, using a price-to-earnings ratio metric, on an absolute basis European shares are, in the aggregate, pretty close to U.S. shares – even a little less.   I could carve up all sorts of measurements highlighting where either has an advantage over the other, but beyond all that sort of data-mining and excessive interpretation, European shares are – if nothing else – comparably priced relative to the U.S. market.  And with ten-year European-government bond yields at just about 4.25%, European citizens continue to be comfortable taking money from fixed income and placing it into equities.

As portfolio European holdings grow excessively some trimming may be warranted for the sake of risk management, but allocations in the 10-20 percent range are perfectly appropriate.