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.
“Driven initially by a slowdown in exports, eurozone growth weakened markedly through 2018, culminating in a 1.2-percent year-over-year increase in GDP in Q4, the weakest pace of expansion in almost five years,” according to IHS Markit.
Beware Contractions
Garff notes that in Europe, some important economic indicators are stagnating.
“Almost across the board, we’re seeing contracting PMIs and OECD leading indicators,” he said. “In addition, with a few exceptions, European indices exhibit smaller relative return on equity and sales growth when compared to other countries. So the current landscape is not great from a fundamental perspective.”
Other data points and country-specific risks indicate some of the Eurozone’s largest economies could be teetering on the brink of recession.
“But a series of country-specific shocks and their knock-on influences on sentiment have driven Italy and Germany close to recession and acted as a material drag on growth in France,” according to Bloomberg.
Looking North In Europe
When ETF Trends spoke with Garff several weeks, he pointed out that two of Accuvest’s preferred European markets are Norway and Sweden, neither of which are Eurozone members.
“Each market has one or two factors that make it attractive, and one or two that signal caution,” he said.
The iShares MSCI Sweden ETF (NYSEArca: EWD) and the iShares MSCI Norway Capped ETF (CBOE: ENOR) are up 3.93 percent and 4.62 percent, respectively, this year. ENOR is being boosted by rising oil prices as Norway is one of Europe’s largest oil producers.
With plenty of economic and headline risk lingering in Europe this year, investors would do well to let data be their guide as Accuvest does.
“Clearly, the last 5 years have been a time to try to get the Macro calls correct,” said Garff. “That said, we don’t really focus on things like Brexit, or try to predict changes in monetary policy. We have to let the data lead us to the best relative value opportunities. That’s the only way for us to have a consistent, disciplined and repeatable process in what has become a pretty wild global equity market.”
Accuvest is a participant in the ETF Strategist Channel.