Investors are taking a closer look at European markets and country-specific exchange traded funds as growth and abating political risks across Europe help improve traders’ outlook.
“It feels like it’s been a very long time coming, but, we’d argue that the vital removal of a substantial degree of uncertainty that the French election has afforded, along with an improving macro and earnings profile, and the ability to access the region on relatively attractively priced valuations is all starting to speak to a re-evaluation of how U.S. investors should think about Europe,” Rob Bush, ETF Strategist for Deutsche Asset Management, said in a note.
The Eurozone markets breathed a sigh of relief after centrist and pro-European Union Emmanuel Macron won the French elections, beating out anti-euro Le Pen. Voters and policymakers have shown a greater preference for European integration, diminishing speculation of an imminent breakdown of the Euro-bloc. Europe has held steadfast against a number of volatile factors, like rising periphery bond yields, looming Grexit and emergence of populist parties pushing for a breakup.
“With the French election now behind us, it’s partly this removal of what was a critical source of uncertainty that has led our CIO Team to move to an overweight position on European equities,” Bush said.
European investors, though, are not completely out of the bush as elections are coming up in Germany in the fall and Italy has yet to finalize a resolution.
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.
European companies are also off to a strong start this year, with first quarter earnings among the strongest in years by some measures. Analysts are also upwardly revising earnings per share forecasts for the region. At Deutsche, analysts are projecting earnings for the Stoxx Europe 600 Index to grow by almost 11% over the next year.
The Eurozone also shows relatively more attractive valuations compared to the U.S., notably on a price-to-book basis.
ETF investors have a number of ways to access Eurozone stocks. For example, the iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ) track Eurozone countries.
Investors who believe the euro currency will continue to weaken 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 the Eurozone, visit our Europe category.