(The author is a Reuters columnist and the opinions expressedare his own. For more from John Wasik see http://link.reuters.com/syk97s)
By John Wasik
CHICAGO, April 28 (Reuters) - Although it's easy to getdistracted by the turmoil in Ukraine, the trickle of economicgrowth in Western Europe continues to boost euro zone stocks andbatter Russian companies. Multinational Western European stocksshould continue to be core holdings in your portfolio.
Things are looking rosier in the countries clobbered thehardest by the 2008 credit meltdown. As of April 25, the ItalyFTSE MIB Index is up 13 percent this year, followed by a 12percent gain in Portugal, almost 8 percent run-up in Ireland, a5 percent increase in Greece and 4 percent recovery in Spain.
Among the negatives: Unemployment, deflation and tightcredit continue to be problems in these countries, even if theyare gaining ground on repairing their fractured banking systems.Also, stock markets in The Netherlands and Germany are downslightly this year (through April 25).
Independent of the Russian turmoil, there are concerns aboutdeflation in the euro zone and a strong euro. European CentralBank President Mario Draghi said on April 24 that weakerinflation could trigger a round of asset buying by the bank. Therising euro also has the rapt attention of central bankers.
"The euro is too high," former ECB president Jean-ClaudeTrichet said on April 23 in Chicago while speaking at theChicago Council on Foreign Affairs. Troubled by weak economicgrowth in central Europe, Trichet noted "clearly we need toelevate growth potential through structural reforms."
A strong euro relative to the dollar will make Europeanexports less attractive and non-euro zone imports to thecontinent cheaper. That could hobble the weak recovery there.Yet if euro zone countries and the ECB can successfully navigatedeflation and re-ignite growth, the picture looks much brighterfor the continent.
To balance the bad and the good, you can pick a low-cost ETFthat focuses on the companies leading the way toward growth andstability.
The Vanguard European Stock Index ETF holds a basketof leading continental stocks with global operations like NestleSA, Roche Holdings AG and Royal Dutch ShellPLC. The Vanguard fund is up nearly 23 percent for thepast 12 months through April 25 and has gained 2 percent year todate. The fund charges 0.12 percent in annual managementexpenses.
A similar fund, the iShares MSCI EMU Index, is up 28percent for the year through April 25 and 2 percent year todate. Its top three holdings include Total SA, Sanofi and Bayer AG. It costs 0.50 percentannually in management expenses.
THE WEAK LINK
Despite the continued hope of a broad-based Western Europeanrecovery, investors need to be aware that the situation betweenRussia and Ukraine puts many multi-nationals in Western Europein a precarious position. Natural resources are a major concern.The region imports some 30 percent of its natural gas fromRussia. Tensions particularly impact Germany because of itsheavy reliance on Russian natural gas.
And some European energy companies are intricately involved- BP PLC owns a stake in Russian state-owned oil companyRosneft, for example.
Sanctions will also take a bite. The European Union isconsidering restricting transactions with Crimean-based banksand other targeted sanctions. The U.S. announced a new round ofcurbs against Russia today. Yet it remains to be seen whetherthe European Union will seriously endanger its energyrelationship with Russia through tougher sanctions.
But the real turmoil is in Moscow's stock market. As one ofthe "BRIC" countries - along with Brazil, India and China -spotlighted by investors as a highly coveted developing economywith high growth, Russia's economic expansion has nearlyevaporated.
Russian debt was downgraded to near-junk status by Standardand Poor's on Friday and the country's central bank raisedinterest rates. Russia's growth may range from 0.5 percent tozero this year as capital flees the country and the rouble comesunder increasing attack.
Investor money flowing into the leading Russian stockexchange-traded fund has all but halted. The Market VectorsRussia ETF holds top Russian companies like Gazprom OAO, Lukoil Company ADR and Sberbank Rossii OAO. The fund is down 15 percent for 12 months throughApril 25 and off almost 25 percent year to date.
The Market Vector's ETF's performance has been aschallenging and volatile as a Russian winter. After losing 74percent in 2008, it gained nearly 140 percent and 22 percent in2009 and 2010. It lost 28 percent in 2011, then gained 15percent in 2012, and then lost again in 2013 to the tune ofabout 1 percent. So far in 2014, it's down 17 percent.
While Russian energy stocks - and investors - will continueto see heightened volatility, a diplomatic solution could calmthe tumult. In the interim, it's probably best to stay away fromRussian stocks and embrace the larger narrative of recovery inCentral Europe. (Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance Editing by Beth Pinsker and Chizu Nomiyama)
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