Jittery investors chill in Europe

Less volatility, good returns are factors in drawing Americans and Asians

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Investors nervous about market volatility around the globe and lackluster prospects for the U.S. have been turning to a familiar destination.

Europe is a known quantity, considered quite promising and relatively stable. As money pulled out of Asian and U.S. markets has flowed into Europe this year, its markets have responded favorably:

Developed European markets are up 7 percent, as measured by the Dow Jones Stoxx 600 index, compared to a 3 percent increase for the U.S. benchmark Standard & Poor's 500 index. The European index outperformed the S&P 500 in 2004 and 2005.

Emerging European markets have outperformed both this year, although experts say they contain several risks.

The average European region stock fund is up 7 percent this year versus the 3 percent gain for the average U.S. diversified stock fund, according to Lipper Inc.

In February, Europe posted the globe's best regional returns, according to Standard & Poor's, led by small-cap and German stocks. Although Europe's overall returns haven't matched the dramatic gains of Latin America or China, they don't carry their extreme volatility either.

"Name some European companies and chances are average U.S. citizens have heard of a lot of them, which provides an immediate comfort level based on name recognition," said Scott Snyder, lead manager for ICON Europe Fund, up 23 percent over the past 12 months with a three-year annualized return of 36 percent.

Not only does Europe represent a bigger chunk of the market outside the United States than any other region, Snyder said, but accounting standards are coming more in line with those of the U.S.

The region's recent gains are a game of catch-up, because European stock prices had lagged significantly behind U.S. shares during the first few years of the decade.

"The biggest reason is the continued closing of a rather large valuation discrepancy between the U.S. and Europe that had existed early this decade and had been as high as 35 percent," said Jason Holzer, senior portfolio manager for AIM European Growth Fund, up 17 percent the past 12 months with a three-year annualized return of 36 percent.

Europe, Holzer said, provides a contrast to the structural imbalances in the U.S. that include high consumer debt and a record trade deficit.

There's a speculative side because low interest rates have resulted in greater liquidity and the rise of hedge fund and private equity activity throughout Europe. Acquisitions, especially in utilities and telecommunications, are lifting the market.

"The merger and acquisition boom in Europe is a long-term theme that's been driving the continuation of the rally this year," said Alec Young, equity market strategist with S&P. "U.S. private equity firms are going into Europe looking for low-hanging fruit in terms of restructurings, and that's driving the creation of value."

Emerging European markets provide the most punch. The hottest fund is Metzler/Payden European Emerging Markets Fund, which is up 33 percent the past 12 months and has a 51 percent three-year annualized return. It is emphasizing energy, telecom and finance.

"Economies of eastern Europe, mostly Russia, Poland, Hungary, the Czech Republic and Romania, are outperforming both the broad European and U.S. markets," said Vladimir Milev, financial investment analyst with Metzler/Payden European Emerging Markets. "This a unique time in their history when staples of life that were uncommon under the socialist system, such as cars and cell phones, now provide a good business for a lot of companies."

Because these new markets have been rallying since mid-2001, the concern is whether it is sustainable and at what point it will correct.

Among the continent's three largest economies, German stocks have been strong performers, up 27 percent last year, followed by the 23 percent gain in French shares and the 17 percent gain in British stocks. Exchange-traded funds track stocks in all three countries.

U.S. investors also can buy stocks of European companies traded here as American depositary receipts, known as ADRs.

Several noteworthy ADRs of European firms:

Syngenta AG, a Swiss agribusiness, is expected to grow at double-digit rates the next few years and has aggressively returned cash to shareholders.

Credit Suisse Group, one of the world's top private banking franchises, has exceptional profit margins, excellent finances and ability to assume risk.

Unilever NV, a United Kingdom-Netherlands company that is one of the world's largest packaged-food firms, with about $49 billion in annual sales, also makes familiar products Dove and Ponds.

Petroleum Geo-Services ASA, a Norwegian oilfield-services company with pricing power and demand for its services, is restructuring by splitting its floating production and marine seismic divisions.

Total SA, a French oil giant with impressive new production pipelines in the Middle East and Africa, also has extensive and controversial operations in Iran.

Andrew Leckey writes for Tribune Media Services.

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