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June 6, 2019, 11:25 a.m. EDT

U.S. bargain hunters should pick up these cheap European stocks

European stocks trade at their biggest discount to U.S. stocks in years

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By Michael Brush, MarketWatch


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The recent market selloff has bargain hunters shopping among U.S. stocks, but, for the real deals, you’ll need to look across the pond to Europe.

Stocks there trade at their biggest discount to U.S. stocks in years, thanks to exaggerated worries about populism that seems to portend a European Union breakup, trade wars and a growth slowdown.

Here’s more on the three big worries and why they might not be such a big deal, followed by a baker’s dozen of stocks that fund managers think are attractive.

The populists

The anti-elitist backlash in the U.S. is playing out in spades in Europe, too. We know this because of the continued rise in support for populist parties across the continent. That trend was confirmed in the late May when populist candidates scored big victories in the European Parliament elections last month.

But the risk that populists will bring down the European Union is smaller than it appears for a simple reason. Populists come from the far right and left on the political spectrum, and they are too far apart to ever form a coalition that scuttles the EU, now 28 nations, 19 of which have the euro as their common currency. “The influence of the populists is likely to remain limited because they are fragmented,” says J.P. Morgan analyst David Hensley,

Any changes are going to happen around the edges. “It is more about the nature of Europe rather than ripping it apart,” says Andrew Clifton, a portfolio specialist for T. Rowe Price European Equity strategy. “It is more a question about what kind of Europe people want.”

Trade-war fears

Europe — especially Germany — has a lot of exposure to China since it exports a lot of goods there. So worries about a U.S.-China trade war-induced slowdown in China spill over into Europe. Plus Tariff Man, or President Donald Trump, is also making noises about putting tariffs on European goods — particularly cars.

But Trump needs a strong U.S. economy and stock market to win the 2020 election. So he can only push these issues so far.

Read: ‘You can’t forecast Trump,’ says award-winning forecaster

The growth slowdown

There’s no denying Europe is far weaker than the U.S. economy. U.S. GDP grew 2.9% last year compared with 1.8% in Europe. Goldman Sachs economists expect 2.4% growth for the U.S. this year, compared with 1.1% for Europe.

But there are some signs of improvement. Euro-area bank loan growth came in at 3.6% in April, which eased concerns that credit growth might be slowing. Consumers are generally in good shape. Eurozone fiscal stimulus in 2019 will be the highest since 2009, points out J.P. Morgan analyst Mislav Matejka.

Plus China pumped a lot of stimulus into its economy in the first quarter. Stimulus can take six months or more to kick in. As it does, this will help European growth, and lift sentiment toward European stocks. “Europe will benefit from that over the next three to six months,” says Clifton.

Read: EU lowers growth forecasts amid U.S.-China trade war

Cheap valuations

That remains to be seen, and the negatives on Europe are persuasive. So Europe is out of favor, compared with the U.S. “Investors have a hard time looking past that short-term declaration and thinking about the long term,” says Euro-bull Grady Burkett, a portfolio manager at the Diamond Hill Global Fund. This has lead to a valuation “overshoot,” he says.

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