Assessing the Case for Europe ETFs

Eurozone stocks and the related exchange traded funds have been impressive performers this year. For example, the iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ) are each up nearly 8% while the S&P 500 is higher by 6.7%.

The Eurozone ETFs are also attractively priced relative to U.S. markets, especially after a multi-year bull run has pushed U.S. equities to record highs, with many areas either fairly priced or trading above their historical values. For instance, EZU is trading at a 14.6 price-to-earnings and a 1.5 price-to-book and FEZ shows a 14.2 P/E and a 1.5 P/B, whereas the S&P 500 Index is hovering around a 18.7 P/E and a 2.7 P/B.

The Eurozone macroeconomic environment has steadily improved, with a significant uptick in manufacturing and services PMIs over the end of 2016. Eurozone growth may continue to pick up speed ahead after the European Central Bank revealed increased loan demand and easing of terms and conditions on new loans to help stimulate the economy.

Additionally, market analysts have upwardly revised their projections on Eurozone markets as a weakening euro currency, stronger global demand and steepening yield curve help support revenue growth, potentially signaling a turn in the prolonged earnings recession.

“Since mid-2016, eurozone growth has steadily strengthened and is now receiving a boost from an unexpected global trade rebound. France has picked up momentum to join Germany and Spain as a growth engine. Italy’s economic data are starting to turn up after a long funk that has stoked an anti-establishment mood. Bank lending is slowly recuperating. Efforts to clean up bad loans at Italian banks, along with capital raisings, may help unclog the credit channel and unleash better growth,” according to BlackRock.

The $8.2 billion EZU allocates over 61% of its combined weight to French and German stocks. Germany and France, in that order, are the Eurozone’s two largest economies and both are holding national elections later this year.

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.

“We find that the market appears very downbeat on Europe’s growth prospects. A big reason we are positive on risk assets in Europe is because the market is not reflecting the region’s better economic performance and outlook. Backing out growth expectations from moves in bond yields and equity indices, we see the market pricing GDP growth of just 1% in the eurozone’s big four economies in the year ahead,” adds BlackRock.

For more information on the European markets, visit our Europe category.

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