European Stocks—Why I Still Expect
Them to Underperform in 2011

While there are problems with jobs and housing in the United States, you must not forget about the massive debt and deficit problems plaguing Europe. Without renewal in Europe and other foreign markets, we cannot expect a sustainable recovery. We are seeing some hesitation in the upward movement of stocks despite what has been a fairly decent earnings season early on. The problem I see is the influx of uncertainties in Europe that is making traders think hard about going long.

While there are problems with jobs and housing in the United States, you must not forget about the massive debt and deficit problems plaguing Europe. Without renewal in Europe and other foreign markets, we cannot expect a sustainable recovery.

In Europe, Spain recently said it would need to raise more capital; this country remains in a risky position.

Britain reported that its fourth-quarter GDP contracted 0.5%, not something you want to hear.

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Take a look at the comparative growth rates. In Europe, there are concerns with the slow growth there. In Germany, the GDP growth in 2011 is estimated to fall to 1.4%. In comparison, the U.S. economy is predicted to grow about 2.4% in 2011.

The Organization for Economic Cooperation and Development (OECD) expects growth in the U.S. and Japan to exceed that in Europe.

I feel that Europe may continue to underperform the global markets in 2010 and 2011.

In Europe, the 27-member European Union (EU) is critical to the global economic recovery. There are over 500 million people in the EU, accounting for about 28% of the world’s gross world product in 2009, according to data from the International Monetary Fund.

The problem is that the big countries such as Germany and France are supporting the weaker members who cannot survive on their own at this time without capital infusion. This is not good and will hamper growth in Europe. The trillion-dollar austerity measures will take away from investing in the country’s growth and economic renewal.

Weak members such as Greece, Ireland, and Portugal may need to be cut off from the EU until such a time that they can rebuild their financial infrastructure, but I doubt this would happen.

The last thing the EU wants is weak members dragging the member group down, especially at a time when the countries are trying to rebound from the global recession.

The reality is that the global economies are interlinked and problems in one region of the world will have a domino effect on countries and regions thousands of miles away. You cannot escape this relationship and, unless there is global economic renewal, I feel there will continue to be high risk.

The bottom line is that sustained growth in America cannot be achieved without renewal in the major world economies, which is why Europe should not be ignored.