Investors bullish on Eurozone equities got some much needed relief Thursday after the European Central Bank unexpectedly lowered interest rates.
The Eurozone’s benchmark borrowing rate has been pared to 0.05% from 0.15% while its marginal lending facility has been lowered to 0.3% from 0.4%. The ECB’s deposit facility is now deeper in negative territory at -0.2% from -0.1%.
That was good news for a broad swath of dedicate Eurozone ETFs, particularly those with a euro hedge, such as the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ), which climbed to a two-month high following the ECB news. [Hedged Europe ETF Soars]
As the Eurozone’s second-largest economy, France is usually a key component of many Eurozone ETFs and those funds look like the preferred avenue for French equity exposure rather than a country-specific ETF such as the iShares MSCI France ETF (NYSEArca: EWQ).
“Sclerosis seems the most appropriate term to describe what France, as well as many other core and orbiting second tier euro bloc economies, have been enduring on a progressively increasing scale over the past four decades – culminating in the steep 2008-2009 downturn precipitated by the collapse of the financial sector on both sides of the Atlantic. Needless to say, recuperation has proved extremely difficult for France. For this reason, an underweight of French shares is still the most optimal investment option for now,” said S&P Capital IQ in a new research note.
President Francois Hollande is sagging in recent polls and his government is re-working its budget-deficit targets after the economy revealed no growth over the first and second quarters. Additionally, recent economic data revealed that the French manufacturing confidence declined to its lowest in 13 months in August. [New Cabinet Could Help France ETF]
Those and other factors are contributing to EWQ’s lethargy this year. The lone France ETF is barely higher while HEDJ is up 7.3% and the SPDR EURO STOXX 50 (NYSEArca: FEZ) is up 1.3%. S&P Capital has a marketweight rating on EWQ.
“The economic policymaking climate in Paris appears as ambiguous to domestic and foreign investors as does the direction of the domestic economy. The fallout from President Hollande’s first attempt at shifting the course of public policy to a more business-friendly approach met with misfortune, when a number of leftwing ministers resigned last month after publicly airing their dissent with the fiscal and labor reforms for which Hollande and Valls have been championing in both parliamentary chambers,” said the research firm. “Subsequently, another cabinet was formed in which Emmanuel Macron, a vigorous proponent of economic reform, replaced leftist Arnaud Montebourg as the Economy Minister. Still, the reformist agenda faces stiff opposition from implacable leftwing ruling party members, who remain adamant in their advocacy of state intervention in the economy and the private sector as well as support for any effort to block relaxation of labor market rigidities – especially, regarding layoffs.”
There is some bright side for French stocks. European dividends are growing again and French stocks are among the top-yielding plays within the blue-chip Euro STOXX 50 Index. [European Dividends are Perking Up]
However, there is a bit of a valuation conundrum pertaining to EWQ and French equities, as S&P Capital IQ notes.
“CAC 40’s positive-adjusted, one-year forward price-earnings multiple (p/e) of 15.5x appears relatively cheap, in that it is 1.3 points below its historical average (16.8x) and 19.3 points lower than its record high (34.8x), in spite of the fact it exceeds its all-time low by 8.6 points. Also, French shares are trading at a discount to many Western European markets, except the German DAX and UK FTSE. Even so, with respect to their euro area and continental bellwethers, French equities trade at roughly an equivalent p/e level. Yet, the CAC 40 is expensive on a relative valuation basis, trading at a 0.18 premium to the MSCI Eurozone,” according to the research firm.
iShares MSCI France ETF
