Europe ETFs: Rally Still in Early Innings

At a time when ex-US international equity exchange traded funds are surging, Europe funds are standing out. Along with lessening political risks, the European market outlook looks attractive on a stabilizing macro outlook, improving earnings and better valuations.

European GDP has outpaced the U.S. last year, growing 1.8% compared to the 1.6% here. We are also seeing recent highs in consumer confidence and purchasing managers’ surveys, along with improvements in employment and a return of some healthy inflation.

“Eurozone GDP rose by 0.6% in 2Q17 from the previous quarter, and 2.2% from a year earlier, Eurostat said on Wednesday. Year-on-year growth accelerated in the four largest eurozone economies, including France and Italy, although both grew more slowly than the bloc as a whole,” said Fitch Ratings in a recent note.

Even with the euro surging, some Europe ETFs are mounting impressive year-to-date showings. For example, the Deutsche X-Trackers MSCI Europe Hedged Equity ETF (NYSEArca: DBEU) is up 8.2%.

Europe valuations remain attractive relative to historical levels. The MSCI Eurozone is only hovering around the 66th percentile of its historical valuation with forward P/E levels 11% below their 2015 peak. Additionally, Europe is also trading at a 16% discount to the S&P 500 and a 7% discount to the MSCI ACWI when looking at the forward P/E.