German Chancellor Angela Merkel will step into her fourth term as Germany’s federal elections wind down. Nevertheless, lingering political ripples in a contentious election cycle may pressure Eurozone exchange traded funds.
“We believe the outcome of the German election will have limited impact on financial markets but see it slowing momentum behind efforts to strengthen the eurozone,” according to BlackRock strategists. “The election result also showed euroskeptic sentiments still run high in the bloc, as evidenced by the larger-than-expected 13% share for the right-wing Alternative for Germany party.”
The recent spate of Eurozone elections revealed greater nationalistic tendencies as a growing number of dissatisfied voices revealed tensions around policies the Euro bloc has adopted, notably rising immigration.
Nevertheless, the Eurozone economy continues to improve, and investors are increasingly looking to the relative cheap market as a potential source of greater returns.
“We prefer European equities over eurozone government bonds and credit amid a sustained, above-trend economic expansion and a steady earnings outlook,” according to BlackRock. “Companies with much of their cost base overseas should have some cover against a strong euro in the short term, we believe.”
To gain exposure to Germany’s market, investors can take a look a single country-specific ETFs, such as the iShares MSCI Germany ETF (NYSEArca: EWG), the largest exchange traded fund tracking German equities listed in the U.S.
ETF investors who are interested in the Europe story have a number of options available, such as the iShares Core MSCI Europe ETF (NYSEArca: IEUR), which is seen as a cheaper “core” alternative to older iShares Europe ETF (NYSEArca: IEV), along with the iShares MSCI EMU ETF (NYSEArca: EZU), which is comprised of of euro member states.
However, BlackRock warned that the euro currency could loss some momentum after a year of appreciating against the U.S. dollar., especially with the Federal Reserve poised to adopt a tighter monetary policy, whereas the European Central Bank maintains a looser policy.
“We see some scope for the U.S. dollar to regain some lost ground against the euro as the Federal Reserve presses ahead of policy normalization and inflation looks ripe for a potential rebound,” according to BlackRock. “We believe core inflation in the eurozone is likely to stay muted, keeping the European Central Bank accommodative.”
Those who are worried about currency risks can look to the currency hedged iShares Currency Hedged MSCI Germany ETF (NYSEArca: HEWG) and the Deutsche X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR).
Alternatively, investors who believe the euro currency could weaken after its recent rally and are bullish on the broader Eurozone can turn to 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 depreciates against the U.S. dollar.
For more information on European markets, visit our Europe category.