Retooled Europe may fuel investing

If you're wondering whether new investing opportunities still grow in old Europe, consider this: In March, Germany's largest electronics company, Siemens, threatened to relocate 2,000 jobs to Hungary to reduce labor costs. After long negotiations, however, IG Metall, the powerful union, gave in on what had been an immovable position: the 35-hour work week.

Late last month, in exchange for a two-year guarantee not to relocate jobs and to invest over $36 million in new factories, workers agreed to work 40 hours a week with no additional pay. IG Metall's unprecedented concession may lead to longer hours not only in Germany but across Europe, analysts say. And that may signal the start of a restructuring that makes European stocks and the mutual funds invested there more attractive, says Ray Mills, portfolio manager of the T. Rowe Price International Growth & Income Fund.

European funds have already shown some strength over the past three months. They managed an average 1.2 percent gain, according to Lipper, in sharp contrast to Latin America (down 8.5 percent), China (down 9.3 percent), and emerging-market funds (down 9.5 percent).

Now, if other European companies can - even in a limited way - follow Siemens' lead and restructure, there is a fair amount of potential for more growth, experts say.

Reasons for optimism

One of the main reasons for optimism is the expansion of the European Union from 15 to 25 countries, which took place on May 1.

"That's a significant increase," says Gareth Lyons, a mutual-fund analyst at Morningstar. "I think it just makes all of the countries a little more competitive. Also, the mobility of labor makes it easier for companies to hire from other countries in Europe."

Mr. Lyons also sees an improving attitude among corporate leaders. "There has been a trend over the last several years to focus more on shareholders," he says. For example, companies are becoming more open about their finances. They are releasing more information, and doing it more frequently, he notes.

"Europe has been a little slow to move in this direction," he says. "But because the shareholder base is so international, there's increasing pressure on these companies. They're competing more in a global marketplace than ever before."

Another positive factor: The valuation of many European companies - the price shareholders pay for the companies' current and projected earnings - are generally more attractive than in the United States and much of Asia, says Mr. Mills of T. Rowe Price. "Because there is a lot of potential there, the valuations are much more reasonable."

Lyons agrees. "A lot of European multinational companies still trade at good discounts to US companies," he says. "We've seen certain companies become big players internationally, like Nestlé, SAP, and Vodafone. They're now global players, as are some of the telecommunication hardware players like Nokia and Ericsson."

Among industries, Mills's exposure to European energy companies is larger than that of most of his peers. "I think oil prices are going to stay higher longer than people think," he says. Also, because more and more oil is coming from some risky parts of the world, including Venezuela, Nigeria, Kazakhstan, and the Middle East, he believes this will help keep oil prices relatively high. While that's not great news for consumers, it will help oil company stocks, he contends.

Winners over the long run

Among the many funds concentrating on Europe, Lyons cites the Franklin Templeton Mutual European and Vanguard European Stock Index funds as two that have turned in decent returns over the long run.

At the same time, he believes well-diversified investors should not ignore Asia just because it's been slumping lately. "It's important to have exposure to the Asian economies," he says "Also, Japan can't be ignored. That market is starting to turn around."

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