European equities and the relevant US-listed exchange traded funds have been receiving increased attention this year as investors look for developed markets investment ideas that lie outside the U.S. That includes the iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ).
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.
However, investors would do well to remember the Vanguard FTSE Europe ETF (NYSEArca: VGK). VGK is the largest dedicated Europe ETF trading in the U.S. Investors should note VGK is not a dedicated Eurozone ETF as highlighted by its hefty weights to the U.K., Switzerland and some Nordic countries.
“Per a BofA-Merrill Lynch survey, 23% of fund managers think European equities are undervalued, while 81% think U.S. stocks are too expensive. I went back and looked at the last time global managers thought the U.S. was this overvalued: it was in 2004, when the S&P 500 Index (SPX) rallied 9%. Against this backdrop, I decided to take a look at the Vanguard FTSE Europe ETF (VGK), which tracks major European markets and has been interesting on the charts,” according to Schaeffer’s Investment Research.
The Eurozone macroeconomic environment has steadily improved, with a significant uptick in manufacturing and services PMIs over the end of 2016. Eurozone growth may continue to pick up speed ahead after the European Central Bank revealed increased loan demand and easing of terms and conditions on new loans to help stimulate the economy.
“Investors loved Europe going into 2016. VGK traded in the red throughout 2016, with low points around the negative 10% and 15% year-to-date marks. Coming into this year, and in the wake of the surprise Brexit vote, Europe was out of favor. But VGK has been in the green throughout 2017, taking out its 2015 close at $49.88 in mid-March. And the ETF is currently outperforming the SPX,” adds Schaeffer’s.
Market analysts have upwardly revised their projections on Eurozone markets as a weakening euro currency, stronger global demand and steepening yield curve help support revenue growth, potentially signaling a turn in the prolonged earnings recession.
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.