European stocks and the related exchange traded funds (ETFs) are coming off dismal performances in 2018. The Vanguard FTSE Europe ETF (NYSEArca: VGK) and the iShares MSCI EMU ETF (CBOE: EZU), two of the largest US-listed ETFs, finished 2018 with losses of about 18% and 19%, respectively.

As of Feb. 11, 2019, the Eurozone-focused EZU is up 4.79 percent year-to-date, but some market observers and ETF strategists are taking a cautious approach to Europe ETFs.

Accuvest Global Advisors, a California-based asset manager and ETF strategist, includes among its solutions the Country First strategy. Country First includes a tactical strategy, global and international core offerings, an emerging markets offering and the Asia Advantage Equity strategy.

Single-country ETFs are the foundations of the Accuvest strategies and the firm has the industry’s longest documented track record of using such funds.

Accuvest President and Chief Investment Officer (CIO) David Garff talked with ETF Trends about some of the lingering issues for Europe ETFs.

Valuations Are Seductive, But…

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.

Accuvest’s Garff notes that while there are plenty of discounted markets in developed and emerging Europe, that does not mean fundamentals across those markets are strong.

“From a valuation perspective, eight of the 12 cheapest countries are in Europe or Emerging Europe,” he said. “The problem is that only one of those countries (Turkey) is even in the top half of the fundamental rankings.  To make matters worse, only three European countries are in the top half of the Momentum rankings.  So Europe as a whole seems like it is going to need to see improving fundamentals and better relative performance before warranting more significant weights in the portfolio.”

After enduring a tumultuous 2018, the iShares MSCI Turkey ETF (NasdaqGM: TUR) is up almost 14 percent this year. Still, the lone Turkey ETF trading in the U.S. has a long way to go to recoup 2018’s 41.50 percent tumble.

In the Eurozone, there signs of fragility and potential recessions.

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