Yale Economist: Buy European Stocks

european-debt-crisisWe’ve all heard the infamous Baron Rothschild quote time and time again, “Buy when there’s blood in the streets.”
One place where it’s tough to find any blood is the U.S. markets.
The financial analytics firm, FactSet, calculates the forward price-to-earnings (based on next year’s earnings estimates) ratio as 17. That’s the highest level in a decade and above the five-year historical average of 13.6.
With that, more and more well-known investors are shifting their money away from the U.S.
And where are they going? Where the blood is: Europe.
Nobel prize-winning economist Robert Shiller, who had a hand in creating the Case-Shiller Home Price Index, is the latest major U.S. investor to recommend selling U.S. stocks. What does he recommend instead? Shiller says its time to buy European stocks.
Recall that Shiller also created the cyclically adjusted price-to-earnings (CAPE) ratio, which takes a long-term view and adjusts for inflation when valuing the market. Shiller’s CAPE ratio recently closed above 27, passing the 2007 high.
That 27 CAPE ratio that the U.S. market trades at is also twice the historical average of Europe’s.

ETFs Reflect Movement

The largest ETF covering Europe is the Vanguard FTSE Europe ETF (NYSEArca: VGK). Its top holdings include the likes of Nestle SA (OTCMKTS: NSRGY), Novartis AG (NYSE: NVS) and Royal Dutch Shell (NYSE: RDS.A).
In truth, Europe has gained a lot of traction so far this year. Shares of the Vanguard FTSE Europe ETF are up nearly three times what the S&P 500 is up year-to-date.
As far as where Shiller sees the most value, he’s investing in indexes that track the Spain and Italy markets. The largest ETFs tracking the Spain and Italy stock markets are the iShares MSCI Spain Capped ETF (NYSEArca: EWP) and iShares MSCI Italy Index ETF (NYSEArca: EWI), respectively. The Italy ETF is up nearly 10% year-to-date, but he Spain ETF is up just 1%.
This comes as the largest holding in the Spain ETF, Banco Santander SA (NYSE: SAN), is down 13% year-to-date. The Italy ETF has top holdings that include Luxottica Group SpA (NYSE: LUX) and Fiat Chrysler Automobiles (NYSE: FCAU).
And Shiller isn’t worried about currency headwinds. Even though the euro is trading at the lowest level in 10-years compared to the U.S. dollar, he’s noted that he is not hedging his Europe positions.

Watch Soros, Buffett and Ross Buy European Stocks

Shiller isn’t the only well-known investor buying Europe. The relative cheapness of these markets has also gained the attention of George Soros, who recently invested heavily in Europe. Famed distressed investor, Wilbur Ross, also recently came out and reiterated that Europe is very attractive from an investment perspective.
Heck, even Warren Buffett is eyeing Europe. He recently said that he’s looking to make some small acquisitions in Western Europe.
Meanwhile, there are positives in Europe. The European Central Bank is undergoing its own form of monetary easing, infusing the European markets with liquidity. The ECB plans on injecting as much as 1.1 trillion euro into the Eurozone. This has the opportunity to be a positive for many European countries and its overall market. The S&P 500 is up 140% since the U.S. started its monetary easing at the end of 2008.
The problems in Europe, which includes high unemployment, high debt levels and the threat of a Greek exit from the Eurozone are well-documented and might already priced into the market.

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