France’s presidential election is in the books, but that does not mean investors should gloss over European equities and the corresponding exchange traded funds. In fact, now could be the ideal time for investors to reconfigure their exposure to Europe ETFs.
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 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.
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.
“We expect the focus to shift to French legislative elections in June. These will be crucial for determining Macron’s ability to implement his economic program, which includes labor market reforms that would make it easier for French businesses to hire and fire,” said BlackRock in a recent note. “We see scope for a mild risk-on reaction to the result, which looks mostly priced in after Macron clocked a first-round victory and polls consistently showed him ahead by a large margin.”
Germany and France are the Eurozone’s two largest economies and as such are usually the two largest country weights in diversified Europe ETFs such as EZU and FEZ. Importantly, Germany holds national elections later this year, meaning that simply because the French election is over, investors can not ignore politics and the potential impact on European stocks.
The European Central Bank (ECB) has been an issue for investors, but the ECB recently noted it will not taper its quantitative easing program, at least not in the near-term. Market observers argued that the ECB could even extend its bond purchasing program to further support inflation. The ECB has already spent over a trillion euros buying government bonds, cut its benchmark rate to zero and adopted a negative deposit rate.
“We are positive on European shares and see potential for renewed investor inflows as focus returns to the region’s improving growth. European purchasing managers’ indexes point to the strongest economic activity in six years. Europe stands to benefit from global reflation, and we see attractive valuations in cyclical shares,” adds BlackRock.
For more information on the European markets, visit our Europe category.