I just returned last night from another great European Advantage Seminar in Switzerland. Once again, we put together a first-class event that included not only terrific speakers in Europe, but equally, amazing tours of Zurich, Geneva, Interlacken and Vaduz, to name only a few places.
If you're considering establishing a financial presence in Switzerland, I would urge you to attend next year's event. I'm in Europe 4-6 times a year and I always have market observations about each visit. On this trip, I visited Vienna, Geneva and Zurich.
There's no doubt that business is buoyant across the continent. Economies are growing very briskly, currently at six-year highs, the euro is a few percentage points away from an all-time high versus the dollar and retail sales are accelerating in most countries. Unemployment rates are declining, even in Germany, which has made a 360-degree economic turn over the last two years as her mighty economy finally shows muscle.
The problem with Europe now is the ECB, or the European Central Bank. Although I don't expect the ECB to aggressively hike rates during this cycle, lending rates are nevertheless rising, hurting fixed-income markets and since early June, hindering further gains in stocks. Property stocks and REITs, one of the best performing sectors since 2000 in Europe, now rank as the worst performing group in 2007, especially in England, Spain and France. Rising interest rates hurt interest rate-sensitive securities.
That explains why investors this year are dumping European bank stocks, REITs and bonds right across the board. And that's why I'm cautious on European stocks this year because after a huge run over the last four years, most markets are not cheap. But as the year progresses, however, I'll be looking hard at British REITs and European banks; the more these sectors decline, the higher their respective effective yields rise. As a reminder, if you invest in dividend-paying European stocks, which tend to yield more than American blue-chips, remember that there's a 15-25% withholding tax applied to your dividend payments.
Assuming the withholding country has a tax treaty with the United States (and most do), you can claim a tax credit with the IRS. But if you hold dividend-paying European stocks in a tax-deferred account, you're not eligible for a tax deduction because tax-deferred accounts can't make a deduction on withholding income. Finally, as a side note, I flew Lufthansa to Europe on this trip via Munich. Usually, I give Swiss International Air Lines the business because Zurich is a hub for my European travel. But Swiss has yet to refit their stale and uncomfortable Business Class cabin. I was very impressed with Lufthansa. The entire cabin is new, seats fully recline into flat-beds and there's even internet access on-board. I was very productive en route to Montreal yesterday. And Munich is a large, clean and efficient airport. Hats off to Lufthansa.
It's Canada Day on Monday, so my next post will be Tuesday, July 3. Have a good weekend.
