A Tale of Two Europes

NEW YORK ( FRED Report) -- Here at the FRED Report ( www.theFREDreport.com), we have watched recent bond auctions in Europe with great interest. We have had concerns that the potential for bad auction results in Portugal and Spain would have a deleterious effect on stock prices worldwide. That has not occurred, and a number of people have asked how best to invest in a European economic recovery.

In various editions of the FRED Report newsletter, we have expounded the theme of "two Europes." By this, we mean that there is definite bifurcation between economically strong countries, such as Germany, and economically weaker countries, such as Spain. We show long-term charts of EWG (iShares MSCI Germany Index Fund), EWP (iShares MSCI Spain Index Fund) and the OEF (iShares S&P 100 Index Fund) below.

When you compare all of these charts, one can see several things. First, starting in November, the OEF has been leading Germany and Spain. This suggests that the U.S. market may be embarking on a period of outperformance that may last through 2011. This is likely a theme even when Emerging Markets are taken into account. We show charts of the EEM (iShares MSCI Emerging Markets Index Fund) and EFA (iShares MSCI EAFE Index Fund) as well.

Second, although Spain has had a fairly big move recently, the long-term outperformance of Germany is significant. We believe that what the markets are saying is that even though this set of auctions has gone well, there is still risk in the eurozone. Our favorite chart in Europe, by the way, is EWD (iShares MSCI Sweden Index Fund) and we show that below.

Sweden has been outperforming Germany, Spain, and even the EFA since November. It is trading a bit more in line with the OEF since then. For now, we would consider EWD an interesting alternative to EWG and EFA if client's suitability and objectives warrant a country ETF.

Fred Meissner is founder and publisher of The Fred Report. Fred is a CMT and past President of the Market Technicians Association (MTA). He recently left Merrill Lynch's Market Analysis Department and Sector Strategy Department to form The Fred Report. A detailed bio is here: Fred Meissner.

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