COLUMN-European stocks beckon as EU turns around

By John Wasik

CHICAGO, July 9 (Reuters) - Buried in a recent avalanche ofanxiety over the Federal Reserve and U.S. bond and stockselloffs was continuing good news about European growth.

With euro zone growth expected to return in the second halfof this year, buying opportunities abound after the recentglobal stock retreat, according to Standard & Poor's Capital IQanalyst Robert Quinn. He expects "fragile growth" by the end ofthis year as businesses start spending again.

The Continent is still a long way from safe-harborterritory, but its recovery may be on course. A reliable growthgauge known as the Markit's Flash Euro Zone Composite PurchasingManagers' Index rose this month to its highest level since March2012, topping forecasts. In addition, the United States and theEuropean Union on Monday began talks on a free-trade agreementthat could boost American and E.U. gross domestic product by$100 billion annually.

If approved, the free-trade agreement would boost sales andprofits of European companies. The two trading partnerstransacted nearly $650 billion in business last year alone.

Even a meager European recovery is positive news forinvestors. Unlike the Federal Reserve's recent announcement thatit could begin winding down its bond-buying program as early asthe end of this year, European Central Bank President MarioDraghi said on June 26 that the ECB's easing program exit is"distant." That policy may provide an underpinning for Europeangrowth.

THE BROAD BET

Although S&P's Quinn sees some sectors turning around fasterthan others - he's favoring banks, industrial goods and services- a well-rounded portfolio featuring large companies couldprovide the right kind of exposure for a buy-and-hold investor.

The iShares S&P Europe 350 Index is anexchange-traded fund that holds European-based global playerslike Nestle, HSBC Holdings, Novartis and BP Plc. The fund is up almost 20 percentthrough July 5 compared with about 19 percent for the MSCI EAFEIndex. The fund charges 0.60 percent annually in expenses.

Holding a similar big-stock portfolio is the Vanguard FTSEEurope ETF, which owns Roche Holding AG,Royal Dutch Shell Plc and Vodafone Group. TheVanguard fund invests in a slightly different index than theiShares ETF and costs less: 0.12 percent annually. It's gained20 percent over the past year.

RISKS REMAIN

Much needs to happen before the "all clear" siren sounds onEurope. The euro zone needs a centralized way of providingbailouts to members. Southern Europe is still struggling underausterity measures and debt loads. Unemployment is stilloppressive in Spain and Greece.

There's also a bumpy road ahead this year for the largesteuro zone countries. Still mired in a mild recession, theInternational Monetary Fund (IMF) predicts that France will grow0.8 percent next year, rebounding from a 0.2 percent contractionthis year. The IMF has cut in half its growth forecast forGermany this year - to 0.3 percent.

Another wild card is China, which is a big customer ofEuropean exporters. Investors are concerned that the world'ssecond-largest economy may recede. The People's Bank of Chinahas taken action to stem a credit crunch and is attempting tocurb growth in the country's "shadow banking" sector.

Downturns or protracted growth in China or the United Stateswould have a negative impact on Europe in a global economy.

That's why European stocks should be a relatively small partof your overall stock holdings - less than 10 percent of thetotal. While there are plenty of quality stocks from thecontinent at reasonable prices, it's still difficult to say whenthe darkest clouds will lift.