“We see European stocks as big beneficiaries of the broadening global reflationary environment and believe investors are too skeptical of the region’s prospects,” Richard Turnill, Global Chief Investment Strategist for BlackRock, said in a research note, pointing out that BlackRock upgraded its view on European equities.
The European economies is expected to enjoy earnings growth in the year ahead from cyclical sectors that benefit from improved global growth and a weakening euro currency. Europe will likely benefit from increased trade as the U.S. led bout of reflation helps bolster stronger growth outlooks globally.
“We believe European equities should benefit in such a reflation scenario, absent any other shocks,” Turnill said. “European earnings have historically been more sensitive to global economy pick-ups than U.S. counterparts, given European firms’ lower margins and large revenue exposure to global and emerging markets.”
However, economic and political risks have kept investors from pushing too heavily into European markets, with most favoring the more stable U.S. stocks for their risk-on needs, which may leave opportunities in the undervalued European equities.
“We believe the political risk priced into European markets around upcoming French and German elections is overstated,” Turnill said.
Potential investors interested in gaining exposure to the European markets have a number of options available. For instance, the iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ) provide access to Eurozone markets. However, the two do not hedge their currency exposure, so they may be negatively affected by a weakening euro currency.
Investors who believe the euro currency will continue to weaken and are bullish on the Eurozone’s outlook can turn to currency-hedged ETF options, such as the the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ). These currency-hedged Europe ETFs may outperform non-hedged Europe funds if the euro continues to depreciate against the U.S. dollar.
For more information on European markets, visit our Europe category.