Europe ETFs have been detracted by political risk over the past year, but with a steadier political environment, investors can look to steady growth outlook.
“We see a steadier Eurozone political environment helping support growth and reform momentum – and bolstering the case for the region’s equities,” BlackRock strategists, led by Richard Turnill, said in a research note.
Eurozone politics have entered a calm period, and the steadier political environment could support sustained, above-trend economic growth, along with some added reforms, potentially “bolstering the case for investing in the region’s equities, in our view,” according to BlackRock.
The anti-euro government sentiment and flareups of nationalism have died down as no major party is pushing to exit the Eurozone. French President Emmanuel Macron is expected to enact a pro-growth agenda with the help of a majority backing in parliament, with labor reforms already off to a good start. Meanwhile, Angela Merkel is anticipated to win a fourth term as German Chancellor Sunday.
“Bottom line: A largely benign European political backdrop looks to be setting the stage for a favorable investment environment in the near term,” according to BlackRock. “This adds to sustained above-trend growth and ongoing monetary accommodation…. We prefer European equities to credit in this environment.”
Related: Why Europe ETFs Are Still in Play
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.
“A much stronger euro is another risk,” according to BlackRock. “This would be a threat to corporate earnings and export growth, and could complicate the European Central Bank’s efforts to reach its inflation target.”
Alternatively, investors who believe the euro currency could weaken after its recent rally and are bullish on the Eurozone’s outlook can turn to currency-hedged ETF options, such as the 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.