Pro Perspectives 2/9/21

February 9, 2021

In a world of inflating stock markets, there remains good value in European stocks.  

U.S. stocks are now 16% higher than the pre-Pandemic highs. Meanwhile, Europe has broadly lagged the recovery in the U.S. and Asia.  As such, stocks in Europe have also been slower to bounce back.  

Germany (the economic leader in Europe) only recovered to pre-Pandemic levels in the Dax last month.  The French stock market remains underwater — about 7% off of the pre-Pandemic highs.  And the weaker spots in the euro zone, Spain and Italy, still have a ways to go to recover the losses in the equity markets over the past year. 

With that, we have a new government being formed in Italy, and it is likely to be led by one of the key players in the Global Financial Crisis recovery, Mario Draghi (former ECB chief).  

If there is a catalyst in Europe for stocks, this might be it, at least for Italy.

Let's take a look at the chart on Italian stocks … 

Stocks are still down 9% from the Feb 2019 highs. 

What have Italian sovereign bond yields done since the speculation started that Draghi would lead a new Italian government?  Yields have gone down, to near record lows (bond prices have gone up).  In the current environment, that translates as a vote of confidence in Draghi (to stimulate economic growth and manage the heath crisis).  

How do you play it?  The ETF EWI tracks an index of top large and mid cap Italian stocks (representing about 85% of the total market cap of the Italian stock market). 

As you can see, if we look at a longer term perspective, this market is still in the early stages of recovering from the damage of the global financial crisis — but the technical picture is compelling, nearing a breakout. 

Now, investing in European stocks is only as good as your outlook on the euro.  And given the profligacy of U.S. fiscal policy (about to get much worse), the damage being done to the dollar makes a bull case for the euro.


And as you can see in the next chart, that fundamental outlook aligns with the technical picture (i.e. working on a new long-term bull trend in the euro) …