The iShares MSCI EMU ETF (CBOE: EZU) and other Eurozone-focused exchange traded funds are trading higher this year. EZU, one of the largest funds in that group, is higher by almost 9% and some market observers are betting on more monetary stimulus by the European Central Bank (ECB) to prop up the region’s fragile economies.
A frequent battle cry of those bullish on European equities is that the region’s stocks offer attractive valuations relative to the U.S. For its part, EZU has a price-to-book ratio of 1.52 and a price-to-earnings ratio of 12.92. The comparable numbers on the S&P 500 are 3.16 and 19.74.
“We believe the European economy requires ongoing monetary policy support. Why? There was a marked slowdown in economic activity last year and inflation remains subdued. Hence tighter financial conditions would pose a risk to the region’s growth,” said BlackRock in a recent note.
Added trade concerns heightened the geopolitical risk in the market, which has been having a headache over Italy and the country’s high debt levels as it preps for a budget that could run counter to the EU’s deficit rules.
Recession Risk
“Tighter financial conditions could push euro-zone gross domestic product (GDP) growth marginally below trend if they persist, we estimate. Data already suggest that Germany, Europe’s largest economy, stagnated in the second half of 2018. Euro-zone growth slowed to a standstill in late 2018,” according to BlackRock.
EZU holds nearly 250 stocks with France, Germany and the Netherlands combining for over 73% of the fund’s geographic exposure.
Europe has been among the least loved areas of the global markets. According to Bank of America Merrill Lynch, Europe equities experienced 25 straight weeks of fund outflows and was the only region recording meaningful outflows this year through the middle of the third quarter.
Related: Italy ETFs Have Been Outperforming
“We see the risk of a broad recession in the region as remote given the European Central Bank’s (ECB) already extra-easy policy, fresh fiscal stimulus and the lifting of the adverse one-off factors mentioned above,” said BlackRock. “Yet markets might be rattled by the lack of policy levers to counter a new downturn. The main worry is probably less an actual recession than the fragmented political and financial landscape in which it would play out.”
France and Italy, the Eurozone’s second- and third-largest economies, are already taking stimulus steps, but both have deficit issues to consider.
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.
