An Investor’s Guide to European Markets | Investing

When the going gets rough at home, foreign lands can look like great escapes for residents and investors alike. Economic uncertainty from tariff wars, federal layoffs and spending cuts may be making you question if the U.S. stock market is the right place for your investments.

Before you start to fret that the sky is falling in the U.S., know that it’s not. At least, not to a degree that it will never rise again. The U.S. has faced hard times before and survived to thrive again. That said, volatility is likely imminent. There’s good reason to consider investing abroad for stabler ground.

In fact, international exposure should always be a part of your portfolio.

“International markets present a more diversified opportunity landscape,” says Matt Burdett, head of equities at Santa Fe, New Mexico-based Thornburg Investment Management. “With a broader array of companies across various sectors and geographies, international markets may be less susceptible to the whims of a few dominant players.”

One place to consider is Europe. Strong gains and better valuations relative to U.S. counterparts make European markets an appealing prospect.

“Look at Europe not as an escape, but as an opportunity,” says David Materazzi, CEO of Galileo FX, an automated trading platform.

The long-running bull market in the U.S. may have created an overconcentration of domestic stocks in your portfolio. If you’d like to change that, here’s what you need to know about investing in European markets:

First, the basics: The European stock market is a lot like the U.S. stock market, but also a lot different.

Like in the U.S., the European stock market is made up of many individual exchanges. The biggest European exchanges include Euronext in Amsterdam and the SIX Swiss Exchange. The London Stock Exchange (LSE) is also often lumped in with European exchanges, even though it’s technically based in the U.K., which is no longer part of the European Union.

Also like in the U.S., there are many stock indexes you can use to measure the broader market or market segments. For example, the pan-European STOXX 600 (SXXP) represents nearly 90% of the European investable market through its 600 stocks from 17 countries and 11 industries. There are also more narrow indexes. For example, the Swiss Market Index (SMI) represents Switzerland’s blue-chip stocks, and the IBEX 35 index represents the Spanish stock exchange through 35 of the most liquid and largest publicly traded companies in Spain.

You can find exchange-traded funds, or ETFs, and mutual funds that track these respective indexes, many of which trade on U.S. exchanges.

ETFs that buy only individual countries may be your best bet for European exposure, says Steven Conners, founder and president of Conners Wealth Management. He currently likes Germany, which you can access through the iShares MSCI Germany ETF (ticker: EWG) that tracks the MSCI Germany Index and trades on the New York Stock Exchange.

There are also major differences between Europe and the U.S. For example, the European market is less tech-focused with more old-world industries, Materazzi says. “Industrials, energy and finance dominate. Capital allocation favors dividends over buybacks.”

Industry regulation is also slower and more political because policy changes require a collective agreement between countries.

Two key features make the European markets particularly appealing: value and macroeconomic conditions.

“Relative valuations have long been an argument in favor of investing in European equities,” says Jack Manley, global market strategist at J.P. Morgan Asset Management.

European stocks often trade at a discount to their U.S. counterparts. This is especially true now, when “the valuation dispersion between the U.S. and Europe is as pronounced as it’s been in decades,” Manley says.

The second point in favor of European markets for investors is the macroeconomic environment.

“Euro area consumer confidence is ticking higher, and financial conditions are improving compared to recent history,” Manley says. “In addition, policy change in the U.S. is forcing European policymakers to look more favorably toward fiscal spending, while simultaneously threatening the U.S. growth outlook – and in turn the U.S. dollar.”

Of course, it isn’t all sunshine and roses across the pond. There are important risk factors to keep in mind before you invest your funds abroad.

One of the biggest is currency risk. The value of the dollar relative to the euro fluctuates. This can impact how much your European investment is worth when you convert it back to dollars.

Another risk is the fact that despite being an ocean apart, Europe and the U.S. are still tightly linked. A company that does considerable business with the U.S. may face lower sales if tariffs are implemented or American consumers slow their spending. So, check what percentage of a business’ sales are from the U.S. before investing, Conners says.

The European market has also experienced a number of “false starts” over the past 15 years, Manley says. “If indeed we are in the early innings of meaningful and sustainable European outperformance, then long-term investors can afford to be a bit late to the party,” he says.

He recommends postponing your investment until there’s a more sustained track record of outperformance.

“If this ends up being another ‘false start,’ then you won’t have to go through the hassle of rotating back out of Europe,” he says. “If it’s not a ‘false start,’ then you miss a year or so of returns, but in theory, have a much longer runway.”

When you do invest Europe, he recommends keeping your allocation above the geographical weight in the MSCI ACWI index, which is just under 12% if you include the U.K. This would “account for the significant uncertainty that exists on the horizon, much of it tied to geopolitics or U.S. foreign policy,” he says.