European equities are performing this year, and that includes both Eurozone and non-Eurozone markets. In fact, the MSCI Eurozone Index is trailing the S&P 500 by just 130 basis points year-to-date.
That’s a modest gap, but it reminds skeptical investors that it’s been a while since European stock beat their U.S. counterparts. However, that doesn’t imply that the former asset class is bereft of opportunity. The opposite is true, particularly for investors who can exercise some patience. The ALPS O’Shares Europe Quality Dividend ETF (OEUR) is an exchange traded fund that eases that burden.
To its credit, OEUR is trailing the S&P 500 by just 20 basis points while outpacing the MSCI Eurozone Index as well as the STOXX Europe Total Market Index. Those are clear feathers in the cap of OEUR, which turns eight years old next month.
OEUR, which tracks the O’Shares Europe Quality Dividend Index, could be a meaningful consideration for investors mulling exposure to European equities due to its quality traits, including the advertised dividend component.
OEUR Quality Could Make Patience Easier
Companies with quality hallmarks, including commitment to payout growth, usually outperform lower-quality counterparts against challenging economic backdrops. Broadly speaking, European economies aren’t careening toward recessions, but there are signs of lethargy.
“Firstly, the European economy seems to be losing some momentum, with many of the region’s leading economic indicators turning back down over the last month or so,” noted Graham Secker, head of Morgan Stanley’s European equity strategy team. “Now, while the magnitude of their reversal is small so far in absolute terms, the European Economic Surprise Index, which tracks how the data comes in relative to expectations, has fallen much more sharply and is now close to a ten year low.”
Economic weakness could highlight another one of OEUR’s advantages: the inclusion of the low volatility factor in the ETF’s index methodology. The low volatility factor coupled with OEUR’s solid positioning among defensive sectors could provide investors with some buffering, should European economies materially slow down over the near term.
There are no guarantees of near-term gain for OEUR and European stocks, but Morgan Stanley’s Secker is bullish on the asset class for the long term.
“For example, Europe’s price to earnings ratio is now down to just 12.5 times versus the U.S. at close to 18 times. Looking out further on a 12 month view, our models suggest 8% price upside from here, which would rise closer to 12% if we include dividends and buybacks. So, when we put all of the above together, we think the outlook for European stocks is perhaps best described as one of short term pain, but for longer term gain,” he concluded.
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