German Chancellor Angela Merkel and French President Emmanuel Macron have presented a 'Recovery Plan' of the European Union worth 500.0000 billion euros. As a solution to face the European economic and social crisis as a result of the expansion of the coronavirus. Which includes objectives of defense of European and national sovereignty in strategic and future sectors of health, industry and the digital and ecological transition. A news that on the other hand has been well received by the international equity markets.
In any case, its effects will not be immediate, but on the contrary, its application is expected to be a little before the end of the summer. In this sense, in the next EU budget there will be a "recovery fund" of 500.000 million, which will allow the 27 to borrow and reimburse together the expenses related to the crisis. Although they will demand that the countries most affected by the coronavirus accept a series of conditions and reforms in their labor and business structures. With regard to Spain, it still remains to specify what these measures will be and how the stock markets of our country will respond.
On the other hand, it cannot be forgotten that the selective equity index of our country, the Ibex 35, is by far the market that shows the weakest of all. It has become unmarked from the other indices of the old continent in recent trading sessions. To the point that everything seems to indicate that very soon it is going to go to the lows of the last few weeks in the month of March. With a price level of around 6000 points and that could even go even lower in the valuation of the prices of the 35 companies that make up this stock index.
Ibex 35: the key in the 5800 points
In any case, the levels to be set in the selective index of the Spanish stock market is very close to 5800 points. Since if it were to be exceeded, it would not be totally ruled out that it would go towards 5400 points. With a very important depreciation potential from the current price levels. Not surprisingly, it would have almost a 20% drop and this scenario could undoubtedly be very dangerous for the interests of small and medium investors. Therefore, it is not a good time to enter the equity markets of our country and this fact should be taken into account when developing any investment strategy. Beyond another series of technical considerations in the technical analysis of this European stock index.
While on the other hand, it should also be noted that the Ibex 35 is heavily burdened by the situation the banking sector is going through. It cannot be forgotten that these have fallen almost 5% in the last stock market sessions, being the worst sector of equities in our country. This factor is a real drag so that the Ibex 35 can recover from these moments and with a certain intensity. As well as the fact that banks have structural problems of great importance and as long as they are not resolved they will not be able to pull the Ibex 35 in the coming months. This is therefore one of the doubts that small and medium-sized investors may have regarding their possible actions in the financial markets.
Fear of rising taxes
Another aspect that can weigh down the Ibex 35 in the coming months is the possibility of raising taxes in a small tax reform. It is a measure that is not to the liking of investors and that can affect the selling current on the buyer from the next few months. While on the other hand, it cannot be forgotten that this is a measure that never falls well in the financial markets. Not only in our country, but in all the stock markets of the world, as on the other hand it is logical to understand. Therefore, you will have to be very attentive to the arrival of this economic and fiscal measure in the coming days to make one or another decision at the end of the second quarter of this year.
On the other hand, no less important is the fact that the selective equity index of our country, the Ibex 35, starts from a position of greater weakness than in the other international and European markets in particular. Within this general context, it should be noted that the probable tax increase that may occur in Spain may be an opportunity to abandon positions in the equity markets, at least for a few months. Because in effect, we will already have more opportunities to find much more competitive share prices and above all adjusted to our personal interests. With a potential for revaluation higher than until these precise moments in which the Spanish stock market is.
Portfolio diversification
A more connected global economy, widespread access to information, and deregulation of financial markets have made it easier to diversify the investment portfolio without breaking the bank. For many investors, prudent diversification has meant more than balancing exposure to asset classes or carefully choosing different sectors or industries in which to invest.
Those in the United States seeking to diversify can begin to look beyond the ambiguous grain waves to the capital markets of other countries and regions. Europe is a particularly attractive option, as it is home to many of the world's leading companies that have rewarded their owners with decades of capital appreciation and dividends.
Here are four methods that an investor, portfolio manager, or financial advisor can use to add stocks from the European market to a well-constructed basket of holdings.
Exchange traded funds
This method of investing in European stocks is particularly useful for investors without a lot of capital. By investing in mutual funds or exchange-traded funds (ETFs) that restrict their components to companies that are based - or do a large percentage of their business - in Europe, the benefits of widespread diversification can be realized at a lower cost. which could be obtained otherwise by trying to construct the positions directly.
Investing through a common vehicle like an index fund, whether structured like a traditional mutual fund or an exchange-traded fund, has some downsides. You often have significant unrealized capital gains lurking in your portfolio. Although significantly less likely, there are scenarios where you could end up paying substantial taxes on someone else's past earnings (a technical point that most investors don't even realize exists with funds). Perhaps more pressing is the fact that you have to take the good with the bad, including addressing the underlying sector and industry weights of the fund's portfolio.
American deposit receipts
Another way to invest in the European stock market is to buy foreign stocks through American depository receipts (ADRs). In some cases, American Depository Receipts are sponsored by the foreign company itself. In other cases, a depositary bank, usually an affiliate of a large financial institution, directly buys a block of foreign shares. This bank operates on the premise that there is an internal market for these foreign stocks and, in turn, income from commissions can be generated by offering access to them.
The bank accounts for these foreign shares and issues securities that represent ownership of them, and those securities are traded on the domestic market, usually on the over-the-counter (OTC) market. In turn, individual investors can buy and sell shares as if they were national shares: connect to the Internet, enter the ticker symbol, review the operation and present it through a brokerage account.
A depositary bank collects the dividends, converts them into US dollars, distributes them to the owners of the American Depository Receipts, and then charges small fees for the ADRs. The depositary bank often handles foreign tax treaty filings, so a 15% withholding rate (instead of the 35% rate) is applied to dividends.
One issue to be aware of when dealing with American Depository Receipts is that many financial portals do not specify whether they report dividend and dividend yield on a pre-tax gross dividend basis - as is done with domestic securities. - or on the dividend net of taxes after withholding foreign dividends (and if the latter case, at what rate). If you want to make a true comparison of apple-to-apple dividends between ADRs, you will have to do a little research and make some adjustments to the numbers.
Another drawback is that the programs involving American depository receipts could be modified or changed in ways that you did not anticipate. But, if this happens, you can leave the program and take direct possession of the underlying foreign shares. However, doing so could involve paying a fee to a broker and the depositary bank.
Direct shares of European shares
This method is the most straightforward, though often the least familiar, for US investors who have only owned domestic securities. For example, let's say you want to own shares in a large chocolate company in Switzerland.
The details of how to buy stocks differ depending on the brokerage firm you use to execute your trades. If you are a retail investor, check with the institution with which you have a brokerage account. A brokerage company should help you exchange US dollars for Swiss francs for settlement, and they will also charge you a spread and inform you of the final execution price and commission amount. The amount of the commission will normally imply an additional commission for the local Swiss broker with whom your broker is related.
One drawback of this investment method is that it requires investing at least several thousand dollars per transaction. You may not technically need thousands of dollars to buy European stocks this way, but the added fees and expenses will take away a portion of your earnings, and you can minimize their impact by trading in bulk. You may also consider prioritizing buy and hold investments to minimize foreign exchange costs that make switching between positions expensive.
Invest in European stocks
A sophisticated analysis of the relationship between currency market movements and subsequent stock market performance shows that Sweden and the Eurozone (Europe's single currency zone) should outperform the US. and other major markets in the coming year.
The research comes from financial analytics firm HCWE & Co, which found that countries experiencing the most positive "monetary surprise" also saw their equity markets outperform nations with the fewest positive monetary surprises. A recent document from the firm explains it as follows:
The potential performance of international equity markets can be ranked one year in advance based on the performance of currencies. The correlation is high, and it lends itself to a consistently successful country selection strategy.
It works more or less this way. Stock markets tend to do well when a currency rises in value (or falls less) against other currencies. The rising value of, for example, a US dollar or a British pound, would tend to attract capital to an economy and thus boost the local stock market.
Opt for the Euro Stoxx
The pan-European Stoxx 600 closed 3,8% lower as markets around the world plunged. The benchmark lost approximately 12,7% during the week, its worst performance since October 2008 at the height of the global financial crisis.
Core resources fell 4,6% to lead losses as all sectors and major exchanges traded sharply in the red. Britain's FTSE 100 lost 3,7% on Friday, France's CAC 40 index was down 4% and Germany's DAX fell 4,5%.
European stocks entered correction territory on Thursday, falling 10% below the all-time highs of February 19 last year, as the rapid spread of the coronavirus beyond China caused world markets to plummet.
Seven major Asia-Pacific markets have also fallen into correction territory, while in the United States, the Dow fell another 1.000 points on Friday. The S&P 500 and the Nasdaq took just six days to fall from their all-time highs into correction territory.
Global stocks are also set for their worst week since the 2008 financial crisis, with the MSCI ACWI global index down 9%.
At the close of the market in Europe on Friday, there were more than 83.700 confirmed cases of coronavirus worldwide, with a death toll of at least 2.859. The first cases were reported on Friday in Azerbaijan, Belarus, Lithuania, Mexico, New Zealand and Nigeria, the most populous country in Africa.
In corporate news, Thyssenkrupp has agreed to sell its elevator division to a consortium of Advent, Cinven and the German RAG foundation in a 17.200 billion euro ($ 18.700 billion) deal, the company announced late Thursday.
Thyssenkrupp shares initially rose but fell 5,6% in afternoon trading after CEO Martina Merz scrapped a one-time dividend and said the proceeds will be used to restructure or sell the remaining businesses.
Bounce in European indices
Once again, when stocks go up, it is Europe that lags behind. With the S&P 500 close to 30% above its March lows, the Stoxx 600 Index has lagged behind with a 21% rebound, despite falling more than the US in the global selloff triggered by the coronavirus pandemic.
The reason? For starters, there's the make-up of the market: Europe has a large presence of cyclical sectors, such as banking and energy, which have underperformed during this crisis. In addition, the region has led the recent wave of dividend cuts by large companies. Investors have also been disappointed by the scale of the fiscal and monetary support measures, as Europe faces the deepest recession in memory. With a correlation that is high when it comes to the selection strategy.