In Morgan Stanley (NYSE:MS)’s European Strategy report from late May, the investment bank tell us what they recommend when you look at European stocks. Obviously, Europe has been on the brink of failure in recent months which poses a major problem for investor confidence. Spanish 10 Year government bonds are currently yielding 6.7% which is dangerously close to the “default watch” zone of 7%.
Meanwhile, Greece is contemplating leaving the euro which would have huge affects on the euro and the markets in general. Italy also remains a huge source of concern as their 10 Year bond yields are in the high 5%.
With all this unsettling news, how could you even think about investing in Europe? For one thing, if you look back at the 2008 Great Recession here in the US, there were lots of value opportunities to be had. Now, the same sort of pullback is happening in Europe.
After a 13% pullback in equities, Morgan Stanley believes that investor sentiment and stock valuations are at “reasonably attractive” levels which could give a relief rally in the short term. Despite this, the investment bank says they still prefer defensive stocks over cyclical stocks as there is still a lot of uncertainty and potentially bearish indicators in the market. In addition to the defensive preference in stocks, Morgan Stanley says they need to see “quality growth and value” before they are able to get behind a stock. The reason being is that stocks with limited growth or valuation can see some substantial losses in a recessionary environment like this.
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The best way to look for potential candidates that fit your investment goals is to use a stock screener. Finding the “cream of the crop” in terms of European stocks is not hard if you know what to look for and how to value a stock. There are several free screeners on the web though such sites as Google Finance and Yahoo Finance.
The bottom line is there are some good value opportunities in Europe right now. Although the region is facing some serious headwinds, there may be some nice contrarian plays if you are able to find them and withstand any further potential risk. The European Central Bank is essentially the last hope for Europe to get back on its feet without dealing with more pain. Unfortunately, the ECB has exhausted most of its lending capabilities which essentially means Spain and Italy are on their own.