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Why We See Opportunity in Europe

by Community Manager

‎01-17-2014 12:43 PM


By Arne Espe,
Vice President, Mutual Fund Portfolios


After a couple of years of persistently dour reports, the flow of positive indicators out of Europe is broadening from a trickle to a respectable stream.


Consumer confidence in December hit its highest level since the middle of 2011, with the U.K. seeing an especially strong surge. Sales of new autos in Europe were the lowest in nearly two decades in 2013, but they finished the year strong, and carmakers forecast that demand will continue to grow this year. The European Commission’s measure of business activity rose above its long-term average in November and December after 24 months of below-average readings.


No one is expecting gangbusters GDP growth in developed Europe in 2014, but there are fewer predictions of prolonged recession and even deflation. Even as the Federal Reserve is starting to wind down its monetary stimulus program, the European Central Bank has made clear that it stands ready to step in with policy help if necessary to keep the recovery on track.


As always, our focus in 2014 is on global valuation and risk management as we work to ensure that our investors are adequately compensated for their portfolio risk. Our approach to this potentially challenging market backdrop is to maintain our emphasis on fundamentals and valuations as the basis for determining optimal portfolio asset allocations.


Given this focus, the better opportunities we see from a valuation perspective are in Europe and in the developing world. We enter 2014 with overweight positions in both of these markets.


The price-to-earnings ratios for the MSCI EMU Index, representing stocks in developed Europe, and the MSCI Emerging Markets Index both remain well below their five-year averages compared to the Standard & Poor’s 500 index.


And while earnings in the U.S. have rebounded to levels well above their highs in 2007, European earnings are still well below their peaks. This provides Europe with a longer runway to improve earnings growth, which we believe will be a challenge for U.S. companies this year, as corporate profit margins are already near record highs.


For more on how we see this year shaping up for investors, please read our 2014 investment outlook.


USAA Investments Managed Portfolio Outlook


Our view of caution toward U.S. equities remains unchanged. We remain slightly overweight in cash in our diversified managed portfolios. For investors interested in income-oriented bond investments, the USAA Intermediate-Term Bond Fund, the USAA High Income Fund and the USAA Income Fund are examples. For investors interested in tax-free income, the USAA Tax Exempt Long-Term Fund, the USAA Tax Exempt Intermediate-Term Fund and the USAA Tax Exempt Short-Term Fund are examples.


We also are overweight to assets that are positively correlated to inflation expectations. The USAA Real Return Fund also provides potential protection against the risks of long-term inflation.


Emerging markets represent another opportunity. Though they were hit especially hard recently, we believe that emerging markets remain attractive. They offer both an interesting long-term prospect for growth and compelling valuations. The USAA Emerging Markets Fund offers exposure to stocks in less-developed countries.


As always, we encourage investors to speak with one of our financial advisors, who can help determine which investment vehicles are best suited for you based on your individual goals, objectives, risk tolerance and time horizon.




This material is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing.


Consider the investment objectives, risks, charges and expenses of the USAA mutual funds carefully before investing. Contact us at 1-800-531-8910 for a prospectus containing this and other information about the funds from USAA Investment Management Company, Distributor. Read it carefully before investing.
Investing in securities products involves risk, including possible loss of principal.


Past performance is no guarantee of future results.


As interest rates rise, existing bond prices fall.


Non-investment grade securities are considered speculative and are subject to significant credit risk. They are sometimes referred to as junk bonds since they represent a greater risk of default than more creditworthy investment-grade securities.

Some income may be subject to state or local taxes or the federal alternative minimum tax.
Foreign investing is subject to additional risks, such as currency fluctuations, market illiquidity, and political instability. Emerging market countries are most volatile. Emerging market countries are less diverse and mature than other countries and tend to be politically less stable.


The S&P 500 Index is a well-known stock market index that includes common stocks of 500 companies from several industrial sectors representing a significant portion of the market value of all stocks publicly traded in the United States. Most of these stocks are listed on the New York Stock Exchange.


USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor.


High double digit returns are attributable, in part, to unusually favorable market conditions and may not be repeated or consistently achieved in the future.


Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License #0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.
Investments provided by USAA Investment Management Company and USAA Financial Advisors Inc., both registered broker dealers.


The Real Return Fund may be subject to stock market risk and is non-diversified which means that it may invest a greater percentage of its assets in a single issuer. Individual stocks will fluctuate in response to the activities of individual companies, general market, and economic conditions domestically and abroad. When redeemed or sold, may be worth more or less than the original cost.


Managed Accounts is a service of USAA Investment Management Company (USAA), a registered investment adviser and broker dealer.


Diversification does not guarantee a profit or prevent a loss.


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