A battered Eurozone seems to be on a slow road to recovery. Spain finally emerged from its two-year recession in the third quarter, and this summer marked the first time in three years that the Eurozone didn’t suffer from a financial crisis. Last week, the European Central Bank lowered interest rates to 0.25%. These signs of life highlight improving economic signals and investor confidence in the region – a sentiment echoed by our own Russ K – and are sparking a surge in select European ETF flows.
Investors flocked to German equities during the height of the Eurozone crisis in 2011, seeking stability in core countries and dumping pan-European exposure. Today, we’re witnessing the exact opposite. ETF flows data shows a 52% increase in inflows for pan-European equities since July. In October alone, the sector witnessed a record $7.9 billion in inflows, breaking records for the third consecutive month in a row. UK equities followed, growing 18% over the past month. Emerging markets and Japan equities saw 15% and 14% growth, respectively, while the U.S. lagged them all with an 11% growth rate.
By taking a “reverse defense” strategy, it seems investors are now pursuing a more diversified approach. The following chart illustrates this trend during the month of October:
In his latest Investment Directions report, Russ Koesterich says “we continue to advocate a benchmark weight to the Eurozone. Economic data continues to look promising, adding to signs that the single-currency bloc’s recovery is gaining momentum. Eurozone company valuations also still looked depressed relative to U.S. company valuations and the region’s corporate earnings are likely to have troughed. But while cyclical risk is taking a backseat, policy and political uncertainties are rising. These include lengthy coalition formation in Germany that is stalling the region’s much-needed banking union reform, Greece and Portugal bailout reviews, and upcoming asset quality reviews by the ECB.” In terms of broad pan-European exposure, a potential solution is the iShares Europe ETF, or IEV. For exposure to countries in the European monetary union, or for UK exposure, potential solutions include the iShares MSCI EMU ETF, or EZU, and the iShares MSCI United Kingdom ETF, or EWU, respectively.