Despite ongoing weakness in Europe, exchange traded fund investors should buy into the Eurozone on the dip ahead of a potential economic rebound next year.
“Significantly easier financial conditions, European Central Bank policy initiatives and a better external environment should allow for a modest rebound in European gross domestic product next year,” Morgan Stanley analysts Matthew Garman, Sebastian Raedler, Krupa Patel and Hanyi Lim said, reports Josie Cox for the Wall Street Journal. “Watch for winners from a weaker EUR, refinancing opportunities and more buybacks.”
Investors seeking to capture Eurzone market exposure should consider a hedged-equity ETF that will help diminish the negative effects of a depreciating euro currency. For example, the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) hedge against the euro currency and would outperform a non-hedged Europe equity ETF if the euro currency depreciates. [3 ETF Moves to Make By Year End]
DBEU takes a slightly broader approach to the European markets, including about a 40% combined tilt toward the United Kingdom and Switzerland. HEZU and HEDJ only cover Eurozone member states. The Morgan Stanley analysts are underweight the U.K. [Why Invest in Europe ETFs]
While there are no U.S.-listed Europe-specific buyback ETFs on the market, the PowerShares International BuyBack Achievers Portfolio (NYSEArca: IPKW) includes a 18.7% exposure to developed European equities, excluding the United Kingdom.
The analysts also hold banks, which have been struggling under regulatory pressures and lower profitability, as one of their largest overweight positions, arguing that valuations look attractive.
For targeted Europe financial exposure, investors can take a look at the iShares MSCI Europe Financials ETF (NYSEArca: EUFN). However, the ETF does not hedge against currency risks. EUFN has a 13.1 price-to-earnings ratio and a 1.0 price-to-book. In comparison, the S&P 500 index shows a 17.7 P/E and a 2.5 P/B.
Banks should “benefit from an upturn in domestic macro news flow and ongoing ECB policy initiatives,” the analysts added.
Christian Gattiker, chief strategist and head of research at Swiss private bank Julius Baer, also shares a similarly optimistic view on the European financial ahead after the European Central Bank’s stress tests. [Stress Test Shines a Light on Europe Financials ETF]
“The ECB’s recently-concluded Asset Quality Review has demonstrated that the worst is over from that respect and banks should now have the confidence to return to lending,” Gattiker said in the WSJ article. “We would expect European banks to emulate the recovery already seen in the profitability of U.S. banks.”
For more information on Europe, visit our Europe category.
Max Chen contributed to this article.