If your clients are on the hunt for international exposure in developed markets, exchange traded funds (ETFs) can certainly help with that. But recent developments – particularly in Europe – are illustrative of the fact that the timing may not always be optimal for exposure to these markets.
The European Economy
Europe’s economy actually has a number of moving parts. While investors can certainly view the continent in one lump, it’s made up of many diverse economies and cultures. In the current climate, it’s interesting to see how the various economies in Europe have dealt with financial crisis.
Ireland is seemingly close to default and denying that they need any form of bailout, while countries like Sweden are on more solid ground, thanks to a history of fiscally conservative policies.
Eastern Europe, on the other hand, consists largely of developing and newly-developed economies, including Poland, the Czech Republic and Hungary. Those economies, too, are coping with crisis in different ways. Poland has managed to survive and thrive in the aftermath, while Hungary briefly grappled with its own debt crisis earlier this year.
The point is, when you think about Europe, it’s important to consider all the moving parts and regions, because the economies that make up this large continent are far from carbon copies of one another.
Europe in the Present
Although Europe’s financial issues are most striking in a few countries, the impact is felt throughout the region.
The financial problems primarily in Spain, Italy, Greece, Portugal and Ireland have resulted in the European Union’s adoption of austerity measures, higher taxes and reductions in federal spending. Naturally, that hasn’t sat well with citizens of those countries, though it’s widely viewed as what’s needed to bring these countries back into solvency.
For the short-term, austerity measures could eat away an estimated 1.5% from overall GDP growth in Europe, but over the long-term, these policies will help fortify the European block. No European Union member has defaulted on its debt and recent sovereign debt offerings from “troubled” eurozone members have been well received by the markets.
However, investors shouldn’t be completely thrown off by the continent’s troubles, since there are some long-term bargains to be had and one can still pick out individual European-country ETFs.
As the markets dumped European stocks during the fiscal scare, European stocks on the Euro STOXX 600 are trading rather cheaply at around a P/E ratio of 15. The depreciated euro has also benefited European exporters – analysts calculate that every 10% drop in the euro could translate to a 0.5% gain in the eurozone’s GDP. Europe may be in a very promising value position if another global financial disaster doesn’t hit anytime soon after being so oversold.
European ETF Plays
As with many regions around the world, the options for investing in Europe are plentiful.
In this kind of climate, in which some countries are doing markedly better than others, single-country ETFs may also be a consideration to fine-tune your exposure and get the movers in your clients’ portfolios.
As stated before, a depreciating euro benefits European exporters and Germany stands to gain the most from a falling euro. The OECD projects that Germany’s economy will expand by 1.9% in 2010. Germany contributes massively to the eurozone’s GDP. In fact, two-fifths of it comes from the high-saving, export-intensive countries of Germany and its neighbors, in addition to Finland.
Additionally, Switzerland, with its added bonus of having exposure beyond the euro currency, is small but has a robust economy. The country boosts a strong currency, low foreign debt and large reserves of gold. Almost 40% of Switzerland’s economy is attributed to global exports and the country is currently on a trade surplus. iShares MSCI Switzerland (NYSEArca: EWL) and iShares MSCI Germany (NYSEArca: EWG) are two examples of the ETFs that give direct exposure to these economies.
In order to explore all of the ETF options for getting exposure to Europe, visit the ETF Analyzer. As a pro member, you can also add Europe ETFs to your model portfolio or watchlist, and set up trading alerts to be notified of a trading opportunity.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.