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How to Profit From European Stimulus Expectations

NEW YORK (TheStreet) -- If you back the opinion of hedge fund manager David Tepper that Europe's Central Bank will have to ease soon, go for Austrian, Dutch or Italian stocks -- bonds have done their dash.

That's the message from fund managers, as voices grow louder on the prospect of more QE from the ECB in June or July. European Central Bank President Mario Draghi triggered fresh speculation on easing when he announced at its policy meeting this month that the "governing council is comfortable with acting next time," after economic projections are assessed in early June. Expectations were further fueled by reports this week that Germany's central bank would support any stimulus measures by the ECB, while individuals such as Tepper have warned about the risks of inaction.

"The ECB, they better ease in June," said Tepper, who runs the $20-billion Appaloosa Management firm, at a gathering of investors in Las Vegas this week. "I don't know how far behind the curve (the ECB is) but I think they're really, really far behind."

Even without stimulus, many fund managers point to better investment fundamentals in Europe -- where valuations are below U.S. markets and economic data continues to improve.

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The consensus is that sovereign European bonds have already reacted to stimulus expectations, with the gap between Spanish and Italian bonds vs. German Bunds viewed as insufficient to warrant jumping in. "European equities are a better investment with Germany at the vanguard," Interactive Brokers chief market analyst Andrew Wilkinson said. "At some point, growth in the periphery will resume, so there's still value to be had there."

Any European stimulus is not expected to float all boats, given challenges some nations face, including the effects of the Russia-Ukraine crisis. As such, managers suggested a targeted approach. "In Europe some countries will do well, and others will be lukewarm -- it depends where the markets are starting from," said ClearPath Capital Partners chief investment officer Brendan Connaughton.

He advocated a core investment such as the MSCI EAFE, the iShares EAFE ETF, the MSCI Europe or the iShares Europe ETF. "If you are going to use a core and satellite approach, the MSCI EAFE (which is predominately Europe) might be a more risk adverse way, and then surround it with specific countries in Europe," the CIO said. "Don't play sectors within countries as that becomes a security bet rather than a macro bet."

At a country specific level, he likes the Netherlands, Austria and Italy -- nations where equity markets are trading below their 50-day moving averages. "Germany is the lynchpin for Europe, but it's trading at 2% above its 50-day moving average so (stimulus) is already priced in, but Italy is below its 50-day moving average so it's an entry point investors might find more attractive," Connaughton said. "Spain is 3.13% above (this level) and for year, its market is already up 9.5%."

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