The iShares MSCI France ETF (NYSEArca: EWQ), the largest France exchange traded fund trading in the U.S., saw some departures prior to Sunday’s first round elections in France. Selling EWQ before the election has proven to be be a poor idea as the ETF is surging. EWQ’s post-election pop has brought its year-to-date to over 13%.
Eurozone stocks and the related exchange traded funds have been impressive performers this year. For example, the iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ) topped the S&P 500 in the first quarter.
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.
“Business-friendly and pro-European Emmanuel Macron became the clear frontrunner for French president after winning the first-round vote, materially reducing perceived European political risk,” said BlackRock in a note out Tuesday. “Centrist Macron and runner-up Marine Le Pen of the far-right National Front will now face off in the final round on May 7, narrowing the field after an unexpectedly tight four-horse race roiled French politics and markets.”
France, the Eurozone’s second-largest economy behind Germany, is a key component in diversified Europe ETFs. In dedicated Eurozone ETFs, France is usually the largest or second-largest country allocation. In diversified Europe ETFs that hold stocks from nations outside the Eurozone, France is usually among the three or four largest country allocations. That means the outcome of the France election in May is crucial to the fortunes of not just EWQ, but EZU and related ETFs as well.
In other words, political risks loom for French stocks, and that could hamper Germany and Italy, which are also slated to hold elections later this year.
“Both Macron and Le Pen are not part of the mainstream parties that have dominated French politics in the Fifth Republic for nearly 60 years. If Macron becomes France’s next president, he may struggle to implement his agenda without a stable parliamentary majority. We expect Italy to be the next focus of European political risk,” said BlackRock.
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