US Jobs Data Send a Signal to Diversify in the Eurozone

 | Feb 03, 2017 | 9:20 AM EST
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The euro appreciated very slightly vs. the dollar and European stocks remained in the green after U.S. nonfarm payrolls increased by more than expected, as the data also showed wage growth was weaker than forecast in January. This means there will be little pressure on the Fed to raise interest rates, if inflation remains in check. It also means investors may want to diversify in the eurozone, where growth is a bit better.

The eurozone managed to surpass the U.S. when it comes to 2016 GDP growth, posting a rate of expansion of 1.8% vs. 1.6% for the U.S. But what's a couple of percentage points between (former) friends? It is very possible that this year's political uncertainty will weigh on the meager economic recovery. For those willing to take risks, this is a sign to start looking for some bargain stocks.

European Union leaders are meeting in the Maltese capital on Friday -- and will certainly talk about U.S. foreign policy. President Trump seems determined to tear up the diplomatic book and start a war of words, and perhaps even more -- a challenge the EU is ill-equipped to deal with, at the moment.

A weak euro would be crucial for the eurozone's recovery to continue. But President Trump's adviser on trade, Peter Navarro, publicly accused Germany of trying to "exploit" the rest of the eurozone members, as well as the U.S., for its own gain from a weaker euro.

I wrote about why this theory doesn't hold water in my story yesterday. Nevertheless, a weak currency is politically sensitive in a year when there are elections in three of the eurozone's major members: the Netherlands, France and Germany. For the moment, Navarro's comments have probably put a floor under the euro's depreciation anyway, regardless of the currency's reaction to today's U.S. jobs report.

Next week, we will see how confident investors in Europe are about the future, as the Frankfurt-based sentix institute releases its economic index. It is calculated from a monthly survey of over 4,000 private and institutional investors in Europe, who are asked to give their assessment of the economic situation and their expectations.

American investors wishing to get some exposure to the eurozone (and why wouldn't they? The U.S. no longer looks like the "safe haven" of the developed world) should perhaps look at companies that are focused primarily on their domestic markets.

Telecom Italia (TI) is such a company. Its net income has been growing strongly over the past couple of years, it has relatively low leverage, with total debt to capital at 66% according to FactSet, and its Italian-listed shares trade on a PE of just 14.8.

In Germany, investors could look at retailer Metro AG (MTTRY) , which has strong operations in the eurozone but also in emerging markets in Central and Eastern Europe. This one looks cheap too, with a PE ratio of just under 16 on the Frankfurt stock exchange; analysts have been upgrading the company's net income forecasts.

It is said that insurers are set to benefit from the end of cheap money, as higher interest rates will boost their returns. One company to look at is Austria's Vienna Insurance Group AG (VNRFY) . Its debt is very low, at just 24.4% of capital, and its net income has been growing at a healthy pace. It, too, offers exposure to the faster-growing markets in emerging Europe.

European companies, like others across the globe, will have to get used to a less-friendly environment for their products and services in the U.S. But equally, U.S. companies might find themselves the target of protectionist measures in the EU, if President Trump's war on free trade continues. Diversifying might be a good strategy.

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