For nearly a decade, European equities have lagged their U.S. counterparts. That situation could be ready to reverse in favor of Europe, but investors need to be mindful of the potential for some volatility.

Economic and political risks have kept investors from pushing too heavily into European markets, with most favoring the more stable U.S. stocks for their risk-on needs, which may leave opportunities in the undervalued European equities.

As ETF Trends reported earlier this week, there are still more than two months before the first round of France’s national elections, but some traders are already initiating bearish options trades on the SPDR EURO STOXX 50 (NYSEArca: FEZ). The iShares MSCI France ETF (NYSEArca: EWQ), the largest France ETF trading in the U.S., has seen modest inflows to start the year.

Bank of America Merrill Lynch analysts “made a bullish case Thursday to buy Europe, based on the idea that corporate earnings there have bottomed and are set to see double-digit growth for the first time since 2010. On a price-to-book basis, Europe is the cheapest it has been to the U.S. in nearly 40 years,” reports CNBC.

Earlier this week, BlackRock, the world’s largest asset manager, also sounded a bullish tone on Europe.

“We see European stocks as big beneficiaries of the broadening global reflationary environment and believe investors are too skeptical of the region’s prospects,” Richard Turnill, Global Chief Investment Strategist for BlackRock, said in a research note, pointing out that BlackRock upgraded its view on European equities.

Investors who believe the euro currency will continue to weaken and are bullish on the Eurozone’s outlook can turn to currency-hedged ETF options, such as the the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ). These currency-hedged Europe ETFs may outperform non-hedged Europe funds if the euro continues to depreciate against the U.S. dollar.

Still, there is the potential for political volatility. In addition to the aforementioned France election, voters in the Netherlands head to the polls next month while Germany and Italy hold elections later this year. However, there are upside catalysts for Europe ETFs.

“European stocks should also benefit from the reflation trade — the boost U.S. markets are seen getting from lower taxes and new government spending on infrastructure — which has been driving U.S. stocks since President Donald Trump was elected,” according to CNBC.

For more information on the European markets, visit our Europe category.

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.

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