European stocks are finally leading. Should financial advisors follow?

Maybe it’s time for financial advisors to finally take that European vacation. At least portfolio allocation wise.

Or, then again, maybe the recent resurgence in European shares is merely an international bear trap.

European stocks have outperformed US equities since President Trump's inauguration. The Stoxx Europe 600 index is up over 5 percent since January 17 versus a 2 percent gain for the S&P 500 and 1.5 percent for the Nasdaq. The delay in tariffs and the potential end of the Ukraine war are widely cited as the reasons for the European equity outperformance, not to mention the best start to a year for European stocks since the 1980s.

And while a single month’s outperformance may not seem like much of a victory, it is a big turnaround when judged against European stocks’ recent performance. US stock returns have trounced European ones in the past five years, with the S&P 500 up over 80 percent compared to a paltry 25 percent gain in the iShares Europe ETF (Ticker: IEV).

Despite the progress in European shares, Sean Beznicki, director of investments at VLP Financial Advisors, remains unconvinced they are a better bet than domestic stocks. He maintains an underweight position in Europe relative to his peers and developed market indices, reflecting the region's fragmented economic landscape. His exposure is primarily allocated through actively managed mutual funds, where portfolio managers exercise bottom-up discretion to identify companies with the highest potential for outperformance.

“We remain cautious on the region, as the strength of the US dollar continues to erode local currency returns, adding an additional layer of risk to European investments,” Beznicki said.

Meanwhile, Christopher Davis, partner at Hudson Value Partners, said Europe is “generally speaking always cheaper and at a discount to the US.” He adds that if one approaches it solely through that lens it will feel like a value trap. Furthermore, he prefers to think about “where a company's revenue comes from rather than the mailing address of its headquarters” when picking securities.

“Our European holdings are global businesses that happen to be based in Europe,” Davis said. “As in the US, we seek to own market leaders, and our current European holdings include ABB, ASML, and Richemont. We typically have less than 10 percent allocated to European headquartered firms, but investors should remember that even the most ‘American’ big-tech firms get close to half their revenue from abroad.”

Will Sterling, partner at TritonPoint Wealth, does not currently have a dedicated allocation to European stocks, but instead looks at the “rest of world” through the lens of the MSCI EAFE Index or MSCI ACWI ex-US Index. There is European exposure in each of those indexes, but they also include equity exposure from countries such as Japan, China, and Canada among others depending on the specific index used as the benchmark. Typically, he invests in the “Rest of World” through active managers for a portion of the allocation. 

“Having an active manager to add value from a portfolio construction allocation standpoint along with stock selection we believe is critical to long-term success,” Sterling said, adding that he also typically allocates a portion of his “Rest of World” exposure to strategies that hedge currency risk. 

Moving on, Matt Liebman, CEO of Amplius Wealth Advisors, said he always maintains an allocation overseas including Europe, as he believes the risk and reward favors diversification in the portfolio over the long-term. Currently, he does not plan to add or subtract meaningfully from his exposure to European stocks.  

“We will continue to evaluate our asset allocation, but we are comfortable with our European stock exposure right now. That said, we are more likely to increase than decrease our exposure,” Liebman said. “Our belief is that markets react to discrepancies between realities and expectations. Right now, the expectations for the European economy are so low that the bar for a positive surprise is rather low.”

Elsewhere, Gene Goldman, CIO of Cetera Financial Group, has been overweight international and European shares in his portfolios for some time as a “diversifier” and to take advantage of cheap valuations. And while he does not plan to increase his allocations at this time, he does believe the European market is in the midst of an “investment renaissance” driven by the combination of fundamental improvement and attractive valuations.

“Over the past 12 months, the ECB has cut interest rates five times for a total of 1.6 percent. Furthermore, there is optimism around a resolution to the Russia-Ukraine war and the end of the bitter cold in Europe, therefore helping natural gas supplies and reducing prices. And from a valuation standpoint, the valuations of non-US equities are significantly below those of their domestic counterparts,” Goldman said.

To gain exposure to European stocks, Goldman uses the Invesco Oppenheimer International Growth fund, which has nearly 40 percent of its portfolio in key European countries of the United Kingdom (23.7 percent) and France (15.7 percent), as well as the Lazard International Equity fund, which has 44.5 percent in continental Europe and 15.9 percent of its holdings in the United Kingdom. 

Finally, Rick Wedell, president and chief investment officer at RFG Advisory, currently allocates about 5 percent of his overall equity portfolios to Europe, primarily through ETFs. And yes, he is considering increasing his international exposure to the portfolio based on the relative strengths of the international versus domestic macro-outlook.

“Given the interdependence of the global economy, the benefits of this diversification are not as pronounced today as they were in the ‘70’s or ‘80’s, but to some extent those benefits still exist,” Wedell said, adding that valuation disparity is also a factor in his European portfolio allocation.