One of the biggest reasons U.S. investors are revisiting Europe exchange traded funds this year is valuations. As in European equities look inexpensive when measured against increasingly pricey U.S. stocks.
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.
“Overseas markets have attracted more investment fund flows this year than the U.S., reflecting a seemingly savvy bet by investors that the performance gap will narrow, or even close. The timing looks right: Given attractive valuations, diminished political risk, low interest rates, and a pickup in global growth, international markets, and Europe in particular, could finally start to outperform,” reports Vito Racanelli for Barron’s.
In a post-Brexit environment, many immediately wrote-off European exposure in a knee-jerk reaction to the ongoing uncertainties. However, investors may miss out on cheap valuations in Europe-related exchange traded funds as a long-term investment opportunity.
The European Central Bank has been implementing a loose monetary policy that dragged yields down to record lows. Consequently, dividend-paying European stocks and related exchange traded funds (ETFs) may strengthen as more investors turn to riskier assets.
Additionally, 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.
“The case for a revival in European stocks, particularly the Continent’s many multinationals, rests in large part on expectations for improving global growth. The International Monetary Fund recently lifted its global growth forecast for 2017 to 3.5% from 3.4%. The more salient news is that global growth, which fell to 3.1% last year from 3.4% in 2015, seems to be regaining momentum,” according to Barron’s.
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.
For more information on the European markets, visit our Europe category.