A: A number of economic reports have come in weaker-than-expected lately, including Germany’s April manufacturing PMI and the ZEW sentiment survey (Source: Bloomberg). However, the recent weak data is potentially good news for eurozone stocks, because investors are likely interpreting it to mean that the ECB will continue its QE. Looking forward, I expect investors to continue to react positively to negative economic news out of the eurozone, in line with the classic “bad news good for markets”, taking downbeat data as a sign of continued easy money.
More importantly, beyond the implications of today’s headlines, there are other reasons to consider raising exposures to the eurozone, and to Germany, today. The eurozone still offers relative value, although it can no longer be characterized as cheap. Looking at price-to-book ratios, for instance, eurozone stocks, as measured by the MSCI EMU Index, are trading at roughly a 42 percent discount to U.S. stocks, as measured by the MSCI USA Index, and a 23 percent discount to the broader market, as measured by the MSCI ACWI Index. Similarly, German stocks, as measured by the MSCI Germany Index, are trading at a 37 percent discount to U.S. stocks and a 16 percent discount to the broader market (Source: MSCI, as of 5/29/2015).
It’s important to consider the possible impact that a further potential weakening of the euro could have on U.S. dollar-based investments in the region, as my colleague Russ Koesterich and I recently discussed.
Exchange traded funds, such as the iShares Currency Hedged MSCI Germany ETF (HEWG) and the iShares Currency Hedged MSCI EMU ETF (HEZU), can provide access to the German and eurozone markets, respectively, while potentially mitigating exposure to fluctuations between the value of the euro and the U.S. dollar.
Sources: BlackRock, Bloomberg, MSCI
Heidi Richardson is a Global Investment Strategist at BlackRock. She is also Head of Investment Strategy for U.S. iShares.