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.
“Several factors have supported growth. Political risks to the eurozone eased following the French elections, business confidence has risen, export demand has improved, and monetary policy support for the economy has gained further traction (credit standards for loans to enterprises eased in 2Q17, according to the ECB’s July bank lending survey). Falling unemployment, which hit an eight-year low of 9.1% in June, has boosted consumer confidence,” adds Fitch.
The ratio of Eurozone earnings upgrades relative to downgrades is at its highest level since 2010, with net upgrades still rising, reflecting the best Eurozone earnings season for beats in seven years. Looking ahead, profitability estimates for European corporations have been improving since the summer of 2016 but remain below 50% their peak pre-crisis levels, which suggests there is more room to run.
Investors that believe the euro is poised to retreat after surging for most of this year 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 continues to depreciate against the U.S. dollar.
For more information on European markets, visit our Europe category.