The performance of Cyclical stocks is directly related to the state of the economy.So if the economy is in contraction mode cyclicals do not perform well. But if the economy growing then they also grow. Cyclicals include the Industrial, Consumer Discretionary, Information Technology and Materials sectors. For example, during recessions restaurant companies will suffer as consumers cut back on their discretionary spending such as eating out, going to the movies, taking vacations, etc.

Defensive stocks, as the name suggests, are great for all economic and market conditions. These stocks perform well not only during adverse economic conditions  but also during periods of economic expansions. This is because even in a recession people have to spend money on life’s necessities such as food, water, electricity, soap, etc. Unlike the cyclicals defensive stocks offer stable growth during recessions and expansions though they do not very high growth during expansions. Either way defensive stocks are a must in an investors’ portfolio as they provide stable and growing dividends and decent price appreciation over the long-term. Defensive sectors include the Consumer Staples, Utilities, Health Care and Telecom.

I came across an interesting article by authors at Societe Generale that clearly explained the concept of cyclical and defensive stocks’ performance using a simple example. From the article:

The graph below provides a concrete example on how Cyclical and Defensive stocks behave. We have chosen the automobile (Cyclical) and beverages (Defensive) sectors in the US and compared their performance. We have also highlighted the main recession periods.

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We obviously notice at a first sight the higher amplitudes of the automobile sector against the beverages, but the most important thing that this chart illustrates, is the behavior of these sectors in a period of contraction. As we can see in the 2008 crisis for example, the decline in prices in the performance of the automobile sector is way larger than beverages. This means that the investor  holding an automobile stock like Ford would have suffer larger losses.

Source: Cyclical vs. Defensive Stocks, Societe Generale

Even though European and the U.S. economies are in recovery it is still a wise strategy to allocate some portion of a portfolio to defensive stocks. Should the current recovery stall for some reason these stocks will offer a “cushion” effect to a portfolio that declines due to adverse market conditions.

Some of the foreign defensive stocks are listed below for investors to consider for further research:

Consumer Staples

1. Unilever NV (UN)
2. Unilever PLC (UL)
3. Nestle SA (NSRGY)
4. Danone SA (DANOY)

Healthcare

1. GlaxoSmithKline (GSK)
2. AstraZeneca PLC (AZN)
3. Novartis AG (NVS)
4. Novartis AG (NVS)
5. Roche Holding AG (RHHBY)
6. Fresenius Medical Care AG & Co (FMS)

Utilities

1. Edp Energias De Portugal SA (EDPFY)
2. National Grid PLC (NGG)
3. Electricite de France SA (ECIFY)
4. Empresa Nacional de Electricidad SA (EOC)
5. Iberdrola SA (IBDRY)
6. Gas Natural SDG SA(GASNY)

Telecom

1. Philippine Long Distance Telephone Co (PHI)
2. Telenor ASA (TELNY)
3. Vodafone Group PLC (VOD)
4. Telefonica SA (TEF)
5. BCE Inc. (BCE)
6. Telstra Corp Ltd (TLSYY)
7. Orange (ORAN)

Disclosure: No Positions

Washington DC, USA

In an article in December last year I wrote why U.S. investors may want to diversify by holding foreign stocks. Quoting from that piece:

For example, though the U.S. stocks have done very well in 2013 and this year, there is no guarantee they will continue to outperform other markets in the future. No country has been the top performer consistently every year as shown in the following Periodic Table of Investment Returns for Developed Markets 2013:

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So it turns out that European stocks have outperformed U.S. stocks at least so far this year. We will have many months to go.Hence we cannot predict if this trend will continue thru the rest of the year.

The question on some investors’ mind is if European stocks can maintain their current bull run.

According to a research report by Thornburg Investment Management, U.S. stocks and their European counterparts have taken turns in outperforming each other in the past. The following table illustrates this fact using the S&P 500 and the MSCI EAFE Index:

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By moving into attractively valued stocks with more upside potential, there’s also more downside protection, as Benjamin Graham’s “margin of safety” precept has long suggested. This common sense investment principle may be why the S&P 500 Index and the MSCI EAFE Index have taken turns outperforming each other over the last four-and-half decades. So while the S&P 500 beat the MSCI EAFE by 58% from November 30, 2007, through October 31, 2014, the MSCI EAFE outperformed the S&P 500 by 60% over the preceding seven years (Figure 2).

Though past performance does not predict future results, in the period from 2000 to 2007 the MSCI EAFE had a strong run beating the S&P 500.

At end of 2014, European stocks were trading at very cheap levels compared to American stocks. However with the current rise of European equities they are not very cheap now but there is still room to grow.

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NOTE: The above chart is based on data as of 12/31/14.

Source: Margin of Safety:Tactical Rebalancing and Strategic Allocation in Overseas Equities, Feb 2015, Thornburg Investment Management

The key takeaway from this post is investors need not dump their European holdings now.Rather they can wait for additional growth as the ECB’s stimulus program has just started. Also any new investments can be made very selectively in a phased manner.

Related ETFs:

• SPDR S&P 500 ETF (SPY)
• SPDR STOXX Europe 50 ETF (FEU)
• SPDR DJ Euro STOXX 50 ETF (FEZ)

Disclosure: No Positions

European equity indices have outperformed their American peers so far this year unlike last year when the S&P 500 was the winner. Compared to the S&P 500’s year-to-date return of -0.9% as of Mar 11th, the returns of major European indices are listed below:

UK’s FTSE 100: 2.4 %
France’s CAC 40: 17.0 %
Germany’s DAX Index: 20.4 %
Spain’s IBEX35 Index: 7.2%

Since European stocks have already run up substantially relative to U.S. stocks, some investors especially income investors may be wondering if they want to get into European stock at current levels. The answer to that question is a big yes. Despite the current rise, many markets in Europe offer attractive investment opportunities. For dividend investors Europe is still a fertile hunting ground. In this post let me list three solid reasons to invest in European dividend stocks now:

1. The gap between dividend yields of stocks and the yields on government and corporate bonds is very wide. Historically this gap has not been this wide according to a research report by Allianz Global Investors.

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2. European firms pay high dividends compared to other regions of the world as shown in the chart below:

The average dividend yield stood at 3.3% at the end of 2014 based on MSCI Europe.The US dividend yield is in the 2% range. Outside of Europe, Australia and New Zealand companies also have high dividend payouts.

Source: Dividends instead of low interest rates, March 2015, Allianz Global Investors

3.European stocks have still room to run according to Nicolas Simar, head of the Equity Value Boutique at ING IM. From an article by Mr.Simar in Investment Europe:

Prices of European equities have yet to fully reflect the ECB’s QE and corporate margins should improve this year due to accelerating global economic growth, which should generate higher dividends. European earnings are still 30% below their previous peak in 2007 while US earnings are 20% above theirs: this gap will close as the ECB remains accommodative and the declining Euro boosts exports and adds to top-line growth.

Another gap set to close is that between the real yields of European equities (3.3%) and German Bunds (0.39%), which is around 90% of the peak seen in September 2008. ING IM believes there are still opportunities to exploit this gap before it narrows.

Selected Cyclical stocks are particularly attractive after their poor performance in 2014 depressed market expectations to the point that some of them are now priced for a recession.

Source: ING IM: European dividend stocks offer buying opportunity in 2015, Mar 12, 2015, Investment Europe

Ten dividend stocks from ten countries on the continent are listed below for further research:

1.Company: Nordea Bank AB (NRBAY)
Current Dividend Yield:  4.55%
Sector: Banking
Country: Sweden

2.Company: Edp Energias De Portugal SA (EDPFY)
Current Dividend Yield: 7.06%
Sector:Electric Utilities
Country: Portugal

3.Company:Diageo PLC (DEO)
Current Dividend Yield: 3.03%
Sector: Beverages
Country: UK

4.Company: Nestle SA (NSRGY)
Current Dividend Yield: 3.20%
Sector: Food Products
Country: Switzerland

5.Company: BASF SE (BASFY)
Current Dividend Yield: 4.00%
Sector: Chemicals
Country: Germany

6.Company: Total SA (TOT)
Current Dividend Yield: 6.52%
Sector: Oil, Gas & Consumable Fuels
Country: France

7.Company: Royal Dutch Shell PLC (RDS.A)
Current Dividend Yield: 6.40%
Sector: Oil, Gas & Consumable Fuels
Country: The Netherlands

8.Company: Telefonica SA (TEF)
Current Dividend Yield: 6.27%
Sector: Telecom
Country: Spain

9.Company:Telenor ASA (TELNY)
Current Dividend Yield: 6.21%
Sector: Telecom
Country: Norway

10.Company:Enel SpA (ENLAY)
Current Dividend Yield: 4.06%
Sector: Electric Utility
Country: Italy

Note: Dividend yields noted above are as of Mar 12, 2015. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

Disclosure: No Positions