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Three Ways to Invest in a Europe Revival

Germany and France look like the best places to buy.
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Europe's stock markets are scorching hot so far this year. Fortunately, it's a big continent. So while you may have missed the boat in the U.K. and Spain, markets such as France and Germany -- especially Germany -- still have lots of room to run.

And in this column, I'm going to give you three picks you can use to add exposure to Europe's stock markets to your portfolio.

For 2006 to date, the German DAX index has generated a total return of 10.6%. The French CAC 40 has returned 7.6%. Not bad for two months' work. And it's especially attractive in comparison with the 3.3% return on the U.S.

S&P 500

index in 2006 to date.

Why have these European indices beaten their U.S. counterparts so badly in 2006 -- continuing a trend from 2005, by the way? Three reasons.

The French and German economies are showing much stronger growth, compared with their past performances.

And, I should add, that's a much bigger improvement in growth than the U.S. is seeing. The German economy, to take the strongest example of these trends, now looks like it will grow by 2% in 2006. That doesn't sound like much in comparison with the 3.6% growth churned out by the U.S. economy in 2005, as measured by the Organization for Economic Cooperation and Development, or OECD. But it represents a huge 80% improvement from the 1.1% growth recorded in 2005.

France, projected to increase its growth rate to 2.1% in 2006 from 1.6% in 2005, shows a smaller 30% improvement. U.S. economic growth, meanwhile, is expected to shrink to 3.5% in 2006 from 3.6% in 2005.

U.S. money managers and investors concede that some companies in Europe are acting more like their U.S. counterparts.

This is in direct contrast to the oft-repeated knock that European companies are hobbled by management-hobbling workplace rules and expensive social policies. This new trend is either great, because it means increased economic rationality, as it's defined in the U.S. Or it's terrible, because it threatens to destroy a European social system that is much more egalitarian than that in the U.S.

I think it's fair to say that most U.S. money managers -- and many of their global counterparts -- are proponents of the first view. Certainly, international capital has rewarded companies such as


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-- its shares are up more than 25% in the last six months -- that have undertaken U.S.-style restructurings.

The restructuring efforts of a company like Siemens are enough to convince many money managers that the rules have changed in Europe -- finally. For investors interested in profiting from restructurings, Europe is much more attractive than the U.S., just because it has so much work to do to catch up.

Investing in the Old Country's economic takeoff is an attractive alternative for investors worried the U.S. economic recovery is getting long in the tooth.

The economies of the euro zone haven't outperformed the U.S. economy since 2000 (and even then the difference was small -- 3.7% growth in the U.S. compared with 3.9% growth in the euro economies).

No one really expects those economies to show higher growth than the U.S. economy anytime soon. It's the direction of growth rates, rather than their magnitude, that spells opportunity in Europe. While the OECD predicts U.S. economic growth will slow from last year's 3.6% to 3.3% in 2007 (a rate most of the countries in Europe would love to achieve), euro zone growth rates are projected to grow from 1.4% in 2005 to 2.1% in 2006, and than to 2.2% in 2007.

I'd steer you away from the U.K. and Spain for these same three reasons. The U.K. was the first European economy to hit its stride, with 3.2% growth in 2004. Growth, however, slumped in 2005 to just 1.7%, according to the OECD, and hopes for a pickup in 2006 are based on the Bank of England cutting interest rates to stimulate the economy.

Barclays Bank

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recently reported a huge 44% jump in charges for bad loans in 2005. Credit card defaults were the biggest contributor to the pop. That's the kind of number that shows up when a period of easy credit, which has produced a booming economy, yields to a period of tighter credit and slower economic growth.

Spain is one of the few countries in the euro zone that are actually predicted to see slower economic growth in 2006 than in 2005. The Spanish economy was pumped up last year by the country's own version of a real estate bubble, and that now seems to be unwinding. The OECD predicts that growth in Spain will drop to 3.2% in 2006 from 3.4% in 2005.

An Extended Trip

I already own two European stocks -- one French,


, and the other German,


. They've both done well, and I'm going to hold on to them.

But I'm also going to add more European exposure to the portfolio. My two existing picks are in the export-driven capital-equipment sector. For this column, however, I'm going to look for companies that can take advantage of revived German consumer demand.

So far, Germany's economic revival has been driven by business spending and export growth. German consumers have been very reluctant to open up their wallets and spend. But recent surveys of consumer sentiment show the strongest consumer confidence numbers in five years.

And of course, I'll be looking for companies that have shown a commitment to restructuring. That's a trait that professional money managers are looking for, I believe, and I'd like to have their cash flow pushing up the prices of the stocks I own. I will be adding all three of these stocks:

Allianz, the prototypical European company:

Sept. 11, 2005, was a big day for insurance giant



. The company, founded in Berlin in 1890, announced its conversion to a European company (a European Union format called a Societas Europaea, or SE), and launched its cross-border merger with Italian insurer Riunione Adriatica de Sicurta. (Allianz is already the No. 2 insurer in the Italian market.)

But it's the company's restructuring and cost-cutting that really attract me. Phase I of the merger plan targeted about $900 million in cost savings, and phase II could top that with an additional $1 billion in savings. This, plus the company's increasingly global reach in the asset-management business, adds up to projected earnings growth of 15% in 2006.

Nestle, not resting on its laurels:

You might not think that a hugely successful company like


needs an overhaul, but Nestle didn't get to be a dominant player in the global food business by resting on its laurels.

The Swiss company has recently spun off its disappointing European fresh dairy operation into a 40-60 joint venture with Groupe Lactalis, the world's largest independently owned dairy business. The joint venture will free Nestle to attack its weakness in the fresh dairy business without riling European antitrust officials.

Nestle CEO Peter Brabeck has further targeted ice cream, bottled water, pet food and nutrition products -- areas where the company needs to fill holes in its operation. The company showed organic growth (that is, before the effect of acquisitions) of 6.2% in 2005. And with a triple-A debt rating, one of the few left in the world, Nestle won't have any trouble making even a large acquisition.

Tele Atlas: A star in personal navigation systems:

Tele Atlas

effectively divides the fast-growing digital map market -- an estimated 27% compounded annual revenue growth rate from 2005 to 2008, according to ING -- with U.S. competitor


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. Navteq is currently the market-share leader (67% vs. 33%), but Tele Atlas looks stronger to me in the fastest-growing end of the market -- digital maps for personal navigation devices. (Navteq, in contrast, is stronger in the in-car navigation end of the market.)

Tele Atlas did especially well in Europe, with 30% growth in the third quarter of 2005. In 2004, the company acquired Geographic Data Technology to expand its market share in North America. With no debt, the company has the room to make other acquisitions so it can build market share in Eastern Europe, Asia and Latin America. Growing by acquisition is a different kind of restructuring -- as opposed to cost-cutting -- but it's probably even more important for a company like Tele Atlas that's attacking such a fast-growing market.

At the time of publication, Jubak owned shares of Conergy. He does not own short positions in any stock mentioned in this column.

Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York. While Jubak cannot provide personalized investment advice or recommendations, he appreciates your feedback;

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