Soaring America or floundering Europe? No contest – buy Europe

Compare the US and Europe for a moment. Which is the better investment?

Surely it’s obvious. The US just posted a fantastic jobs report. Against all scepticism, the American economy is rallying fast.

In Europe, on the other hand, Greece is still very much the word. The country shows no intention of backing down. But no one else wants to cut it the sort of slack it’s looking for either.

So you’ve got one major economy showing every sign of strong growth, while across the Atlantic the other is mired in gloom, and potentially on the verge of a damaging split.

So yeah, it’s crystal clear where investors should be looking.

Europe, of course…

The future is bright for workers in the US

The US jobs report on Friday was very impressive, no doubt about it. Non-farm payrolls gained 257,000 in January. And the figures for the two months before that were revised up by a total of nearly 150,000.

You’ll get nit-pickers trying to data-mine it for misery to fit their world view or their politics. But for investors, it’s the trend that matters.

To be clear, rising employment doesn’t mean the US is back on top, that the job gains are sustainable (or not), or that Barack Obama is the best president ever in the history of the world.

All it means is that the cycle has firmly turned up in the US. And it’s useful to be aware of that if you care about the big picture when you’re investing.

The long and the short of it is that more people have jobs, and they are also getting pay rises. Wages were up by 2.2% year on year, which was also much stronger than expected.

This means more pressure on the Federal Reserve to raise interest rates earlier than the market was expecting. A panicky column from Lawrence Summers – the former US Treasury Secretary who has been punting the ‘secular stagnation’ theory around the world – in this morning’s FT, declares that the Fed shouldn’t raise interest rates until “the whites of inflation’s eyes are visible”.

But the point of central banks in general is to anticipate and act ahead of things like inflation getting out of control. It’s not going to be easy for the Fed to justify keeping rates at an ‘emergency level’ of near-zero simply on the basis that the global economy might not be ready for it.

The tricky thing is, of course, that any rise in rates takes us closer to the day when we learn just how much the US recovery has been based on cheap debt.

The rising US dollar is already causing havoc in emerging markets, and with S&P 500 companies that make significant amounts of their money overseas (because overseas earnings shrink when converted back into strong dollars).

Don’t get me wrong. The US economy may quite happily cope with slightly higher interest rates. Momentum is behind it, after all. And the whole point of raising rates is to make sure the economy doesn’t overheat.

But as we should all have learned by now, the direction of markets and the strength of an economy bear no relationship. With US stock markets being historically very expensive right now, there’s not much room for disappointment or things going wrong.

Europe could surprise us all

And then there’s Europe. Economic growth is pitiful (ironically, Greece is likely to post one of the strongest fourth quarter GDP growth figures in the zone later this week). The currency is under threat from both quantitative easing (QE) and the fear of Greece being forced out.

Yet, beneath the surface, things might not be quite as bad as they look. A really interesting report from CrossBorder Capital hit my inbox the other day.

The research group specialises in looking at money flows around the world. Ultimately, it’s the flow of money that drives asset prices up or down, regardless of economic conditions. And by the looks of it, liquidity in Europe is picking up.

It’s not just down to the European Central Bank’s QE. It’s about the private sector gradually recovering. “The quality of European household and corporate balance sheets is fast improving and investment risks must be dropping, as a result.”

With the launch of QE, and increasing private sector liquidity, “eurozone equities are increasingly better supported than either US and certainly UK stocks”.

Critically, they’re also a lot cheaper. And for me, that’s the clincher. In Europe, you have a lot of bad news and risk priced in. That means it only takes a few happy surprises to drive markets higher. In the US, everything’s looking good – and markets are priced for that too. So it only takes a bit of glum news to knock them for six.

Now, to be clear – I’m not saying the eurozone couldn’t still come to a sticky end. My colleague Tim Price has a very gloomy take indeed on the European crisis. You can read more on his view here.

I just reckon you’ll still find better opportunities in the areas where other people fear to tread. That’s why I’d rather back eurozone stocks than US ones. You can read more about the markets we particularly like in a recent issue of MoneyWeek magazine.

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

Leave a Reply

Your email address will not be published. Required fields are marked *