Still, it is time to reconsider. For the first time since 2012, corporate profits in Europe turned up 5.05% in the fourth quarter. “The mother’s milk of stock prices is corporate profits.” As confirmation and to everybody’s surprise, the euro is up 1.2% so far this short year.
More surprising are the “bullets missed.” Nobody expected the different European stocks market to recover so quickly after the stunning Brexit vote nor after the stunning Trump victory. Those markets are displaying a resilience that was not thought to be there.
Of course, governance is the Achilles’s Heal of the European Union. It will survive the exit of Britain, largely because the Brits continued using the pound as their currency, not the euro. France is different and uses the euro. It also faces an election this Spring. If far right candidate Marine La Pen wins, she is expected to return France to the franc, leaving the euro, which is a direct threat to the stability of the European Union.
Money invested in the bond market is often considered “smarter” than money in the stock market. The European bond market has a clear case of the jitters. The difference in yield between French bonds and German bonds has risen over the last four months.
No discussion of Europe is complete without mentioning the “wild child,” who is Greece. After its near-death experience five years ago, it returned to the bond market triumphantly in 2014 when it refinanced much of its debt. However, the first payment of about $2.1 billion comes due in July, and it is not clear how they will repay it. The bond market thinks it will not be a problem as the value of those bonds has increased significantly in recent weeks. Importantly, Europe has already had five years to adjust to this eventuality. Default now will not be as destabilizing as default in 2012.
My sense is that it will soon be time to allocate more money into Europe, but not before the French election and maybe not until it is clear the Greeks have changed their profligate entitlements. Stay tuned . . .