The Greece-induced sell-off has caused a correction in European stocks and related exchange traded funds, creating an opportunity for bargain hunters who want access to Eurozone markets on the cheap.
Europe’s multiples now look cheap compared to earnings, whereas U.S. stocks are trading at a high multiple of earnings that appear at the top of its cycle, writes John Authers for Financial Times.
For instance, the iShares MSCI EMU ETF (NYSEArca: EZU) and the SPDR EURO STOXX 50 (NYSEArca: FEZ), which both focus on Eurozone countries, show a price-to-earnings ratio of 15.9 and 15.2, respectively, whereas the S&P 500 index has a 18.9 P/E.
Additionally, the euro-currency hedged Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ) has a 16.7 P/E, iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) has 15.9 P/E and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) has a 16.9 P/E.
Adjusting for the cyclicality of profits over the 10 years, Eurozone stocks look cheap, compared to their historical averages, according to Research affiliates. For instance, Italy and Spain are trading at a cyclically adjusted multiple of 11.2 and 12.4, respectively, compared to historic averages of 21.3 and 15.5.
Investors can also target the two markets through the iShares MSCI Italy Capped ETF (NYSEArca: EWI) and iShares MSCI Spain Capped ETF (NYSEArca: EWP). Additionally, BlackRock recently launched euro-hedged versions of the two funds, including the iShares Currency Hedged MSCI Italy ETF (NYSEArca: HEWI) and iShares Currency Hedged MSCI Spain ETF (NYSEArca: HEWP).
The recent sell-off may provide a long-term opportunity for the Eurozone market. Supporting the region, the European Central Bank has been implementing a quantitative easing program. As witnessed here in the U.S. with the Federal Reserve, the bond purchasing plan in Europe could also support the markets and weaken the euro currency.
The pressure on the euro currency could also make European exports, a major component in their economy, cheaper and more competitive on the global market. For investors, the loose monetary policy means that people may need to hedge currency risk when exposed to Eurozone equities – a weaker EUR means that potential stock returns are lower when converted back into the stronger U.S. dollar.
Greece remains a short-term concern. Nevertheless, the Greek government has offered up a new bailout proposal that includes heavy austerity plans for debt sustainability, the New York Times reports. [Don’t Let Short-Term Risk Dissuade You From Europe ETFs]
For more information on Europe, visit our Europe category.
Max Chen contributed to this article.
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.