With major national elections scheduled this year for a slew of major Eurozone economies, including Germany and France, the region’s two largest economies, some investors are understandably pensive about embracing European stocks and the related exchange traded funds.
However, improving economic conditions and strengthening company earnings in Europe are signals that diversified exchange traded fund investors should keep in mind when looking for areas of potential growth after a multi-year run in U.S. markets leaves less opportunities at home.
Investors interested in gaining exposure to the European markets have a number of options available. For instance, the iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ) provide access to Eurozone markets. However, the two do not hedge their currency exposure, so they may be negatively affected by a weakening euro currency.
The Eurozone ETFs are also attractively priced relative to U.S. markets, especially after a multi-year bull run has pushed U.S. equities to record highs, with many areas either fairly priced or trading above their historical values. For instance, EZU is trading at a 14.6 price-to-earnings and a 1.5 price-to-book and FEZ shows a 14.2 P/E and a 1.5 P/B, whereas the S&P 500 Index is hovering around a 18.7 P/E and a 2.7 P/B.
“The Netherlands holds elections next week, soon to be followed by France, and later Germany and Italy. We are most focused on the outcomes in France and Italy, where populist parties could potentially gain power. Government yields there are up sharply, with spreads at some of the widest levels since the eurozone sovereign debt crisis,” said BlackRock in a note out Tuesday.
The iShares MSCI France ETF (NYSEArca: EWQ), the largest France ETF trading in the U.S., has seen modest inflows to start the year ahead of what could potentially be a controversial election in the Eurozone’s second-largest economy.
“Markets view France’s presidential vote as the next potential electoral shock. Populist candidate Marine Le Pen, who has flagged a referendum on EU membership and reintroducing the franc, appears poised to make it to the final round of the two-round voting system,” said BlackRock. “Yet if she does, polls suggest she will likely lose, with a polling gap far wider than that seen ahead of the Brexit and U.S. election surprises. Even if Le Pen were to win, we believe she would have a hard time securing a majority in parliament, lowering the near-term risk of a eurozone breakup.”
For more information on the European markets, visit our Europe category.