As has been widely documented, Europe exchange traded funds are among this best performers when it comes to developed market equity funds. For example, the SPDR EURO STOXX 50 (NYSEArca: FEZ) is up 17.2% while the S&P 500 is higher by just over 9%.
Importantly, Europe ETFs are rising against the backdrop of a stronger euro. In fact, the euro is one of the best-performing developed market currencies in the world this year while the dollar is one of the worst. The strong common currency is not yet pressuring Eurozone earnings.
“Despite this, corporate earnings growth expectations for the Eurozone remain upbeat. The most recent earnings growth estimates for 2017 are better than they were in the first quarter and at the beginning of the year,” said State Street in a recent note. “The region’s earnings growth continues to top its US counterparts, as shown in the chart below, and it is expected to do so for the rest of the year.”
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.
“Consumer confidence is at its highest level post-financial crisis, while the Markit Eurozone Manufacturing Index is near a three-year high,” according to State Street. “Improving economic prospects and reduced political risk have also compressed bond spreads of France, Italy and Spain over Germany.”
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FEZ allocates 68% of its combined weight to French and German stocks. Financial services, one of the hottest sectors in Europe this year, are over 23% of the FEZ roster while industrial and consumer discretionary names combine for a quarter of the ETF’s weight.
“Eurozone equities are trading around a 15-year average—compared with 15-year highs for their US counterparts, based on price-to-book ratio, presenting investors a value opportunity,” notes State Street.
With the bull market in U.S. stocks aging and investors increasingly feeling stocks here are richly valued, some are turning to Europe and the related exchange traded funds in search of bargains. FEZ shows a 14.2 P/E and a 1.5 P/B, whereas the S&P 500 Index is hovering around a 18.7 P/E and a 2.7 P/B.
For more information on the European markets, visit our Europe category.