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LONDON, ENGLAND – OCTOBER 20: An employee views trading screens at the offices of Panmure Gordon and Co on October 20, 2014 in London, England. Markets stabilised over the weekend following global turbulence amid fears over the Ebola virus and global economic concerns. (Photo by Carl Court\/Getty Images)<\/p>\n
Getty Images<\/p>\n
Remember a few months ago, when the \u201cbuy Europe\u201d trade was red hot?<\/p>\n
Well, if you\u2019re like me, you\u2019re wondering where all the hype went! Now \u201cbuy America\u201d is back on, but European markets are still sky-high\u2014well ahead of their American cousins.<\/p>\n
That spells trouble for anyone with a portfolio that\u2019s still tilted too much toward Europe.<\/p>\n
So today we\u2019re going to look into where things are headed (hint: back to the US in a big way!). We\u2019ll also delve into three funds with European exposure (two of which are closed-end funds<\/a> sporting double-digit dividends) that I urge you to hold off on now.<\/p>\n Headlines Drove \u201cBuy Europe,\u201d But Corporate Profits Failed to Materialize<\/p>\n The Financial Times was one of many outlets cheerleading a shift to Europe from America back in the spring. At the time, this sentiment was driven by tariffs, seemingly overextended US tech stocks and surging US markets. <\/p>\n \u201cThere\u2019s all sorts of reasons to like Europe, all sorts of reasons to hate the US,\u201d contributor Katie Martin said in an April 25 FT podcast.<\/p>\n The buy Europe trade was working well as recently as June, when the FT again reported that \u201cEuropean small-caps outshine US rivals as investors bet on growth revival.\u201d Note the phrase growth revival here: The idea was that European stocks were overlooked and would gain attention when their earnings grew. Except that didn\u2019t happen, with European firms posting disappointing earnings, as shown in the table below (more on this in a moment).<\/p>\n European Earnings Slump<\/p>\n Factset<\/p>\n Meanwhile in the US, companies saw 9% year-over-year earnings gains in Q2, meaning their average profit growth was much higher than the best sector in Europe (financials). And if you compare the best sector in the US\u2014communication services (see chart below), which includes firms like Alphabet (GOOGL), Meta Platforms (META) <\/strong>and Netflix (NFLX)<\/strong>\u2014to its cousins in Europe, the difference is staggering.<\/p>\n As you can see at left above, the US sector\u2019s 40.7% earnings growth is many times greater than the best European companies can produce. Meantime, Europe\u2019s tech and telecom companies combined can\u2019t even muster more than 1% average growth between them.<\/p>\n Where does that leave the European markets? Well, they\u2019re simply not reflecting this reality.<\/p>\n With S&P 500 benchmark SPDR S&P 500 ETF Trust (SPY)<\/strong>\u2014in purple above\u2014far behind the Vanguard European Stock Index Fund (VGK)<\/strong>, in orange, as of this writing, it\u2019s clear, based on our look at earnings, that European stocks are overbought.<\/p>\n This makes VGK a fund to avoid<\/a>. But ETFs aren\u2019t our main focus at CEF Insider. So let\u2019s turn to two CEFs that could face similar pressure.<\/p>\n That, by the way, doesn\u2019t mean these are bad funds\u2014quite the contrary. But now is not the time to buy them, as they do have significant European holdings likely to weigh on them in the coming months.<\/p>\n The first one is a good example of a fund I\u2019ve liked in the past and will surely like again at some point: the abrdn Global Infrastructure Income Fund (ASGI)<\/strong>. This fund yields a rich 11.8%, and its payout has been steady\u2014it\u2019s even moved up recently (though the dividend varies based on management\u2019s assessment of the market and other factors).<\/p>\n ASGI Dividend<\/p>\n Income Calendar<\/p>\n Moreover, the fund isn\u2019t inherently European\u2014in fact, it has 55% of its portfolio in US stocks, including cornerstone infrastructure players like Norfolk Southern Corp. (NSC)<\/strong> and NextEra Energy (NEE)<\/strong>. Still, it has 22% of its holdings in continental European stocks, plus another 2.6% in the UK.<\/p>\n That\u2019s enough to put a drag on the fund\u2019s portfolio when European stocks snap back to reality. Plus there\u2019s ASGI\u2019s rich valuation<\/a>.<\/p>\n ASGI has been riding the enthusiasm about foreign assets, causing its discount to net asset value (NAV, or the value of its underlying portfolio), which was averaging around 12% going into 2025, to evaporate. When European stocks correct, this fund will likely see a discount\u2014and a consequent drop in its share price.<\/p>\n Our second, and final, CEF to be wary of now is the PIMCO Income Strategy II Fund (PFN). <\/strong>This corporate-bond fund yields 11.5% and has held its payout steady since the pandemic days of 2021.<\/p>\n However, as I write this, PFN trades at a 5.6% premium to NAV. And while it does have about 77% of its portfolio in the US, its largest allocations by country include European nations\u2014France (3.2%), Spain (3%) and Germany (2.4%), to be precise\u2014and Brazil (2.5%), which faces particularly steep tariffs from the US.<\/p>\n To be sure, these are conservative allocations, but throw in PFN\u2019s premium and you get a real risk of a pullback, in both the fund\u2019s NAV and its market price, on any significant European selloff. And lower returns, especially in the fund\u2019s NAV, could put pressure on PFN\u2019s payout.<\/p>\n The bottom line on all three of these funds? While geographic diversification is key for any portfolio, it\u2019s only a matter of time until European stocks drop to reflect their meager earnings growth. Until European firms start booking bigger profits, we\u2019re best to look elsewhere for growth.<\/p>\n Michael Foster is the Lead Research Analyst for Contrarian Outlook<\/a>. For more great income ideas, click here for our latest report \u201cIndestructible Income: 5 Bargain Funds with Steady 10% Dividends.<\/strong><\/a>\u201d<\/strong><\/p>\n Disclosure: none<\/p>\n","protected":false},"excerpt":{"rendered":"LONDON, ENGLAND – OCTOBER 20: An employee views trading screens at the offices of Panmure Gordon and Co…\n","protected":false},"author":2,"featured_media":349458,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[5174],"tags":[123664,36647,36648,123666,36650,2000,299,5187,123667,36649,123663,123665,22273],"class_list":{"0":"post-349457","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-eu","8":"tag-asgi-news","9":"tag-cefs","10":"tag-closed-end-funds","11":"tag-discount-to-nav","12":"tag-dividend-investing","13":"tag-eu","14":"tag-europe","15":"tag-european","16":"tag-european-funds","17":"tag-high-yield-funds","18":"tag-pfn-news","19":"tag-premium-to-nav","20":"tag-retirement-income"},"share_on_mastodon":{"url":"https:\/\/pubeurope.com\/@uk\/115039151637285535","error":""},"_links":{"self":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/349457","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/comments?post=349457"}],"version-history":[{"count":0,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/posts\/349457\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media\/349458"}],"wp:attachment":[{"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/media?parent=349457"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/categories?post=349457"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.europesays.com\/uk\/wp-json\/wp\/v2\/tags?post=349457"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}