The iShares MSCI France ETF (NYSEArca: EWQ), the largest France exchange traded fund (ETF) trading in the U.S., has spent plenty of time in the limelight this year thanks to France’s national election, which was completed in May.
Financial markets got their desired result when Emmanuel Macron emerged victorious. France, the Eurozone’s second-largest economy behind Germany, is a key component in diversified Europe ETFs. In dedicated Eurozone ETFs, France is usually the largest or second-largest country allocation. In diversified Europe ETFs that hold stocks from nations outside the Eurozone, France is usually among the three or four largest country allocations.
EWQ is up nearly 20% year-to-date and almost 2% over the past month, indicating that markets do indeed like the idea of a Macron presidency. Recent parliamentary elections could set the stage for Macron to govern more easily and push through important reforms.
“The two-round election has given Macron’s La Republique En Marche! (EM) party a large majority with 308 out of 577 seats (53.4%), and another 42 seats for the centrist EM ally Democratic Movement party, giving the president 350 seats (60.7%). It underscores the breakdown of traditional party politics, with the previously dominant Socialist and Republican parties winning a combined total of 142 seats, down from 474 in the previous parliament,” according to a note from Fitch Ratings.
European equity markets have lagged the U.S. for a lengthy stretch, but even amid potential Eurozone political volatility, some market observers believe Europe could be a desirable developed market destination this year.
Potential investors interested in gaining exposure to the European markets have a number of options available. For instance, the iShares MSCI EMU ETF (NYSEArca: EZU) and SPDR EURO STOXX 50 (NYSEArca: FEZ) provide access to Eurozone markets. However, the two do not hedge their currency exposure, so they may be negatively affected by a weakening euro currency.
The Eurozone macroeconomic environment has steadily improved, with a significant uptick in manufacturing and services PMIs over the end of 2016. Eurozone growth may continue to pick up speed ahead after the European Central Bank revealed increased loan demand and easing of terms and conditions on new loans to help stimulate the economy.
“An early test of the new administration’s ability to deliver will be its labour market reforms. Proposed measures include allowing negotiations to be conducted in-house and directly with employers rather than negotiations with unions at national or branch level, capping severance packages in cases of unfair dismissal, reducing employee and employer contributions, and cutting labour costs through incentives for permanent contract hiring. We think these would contribute to a reduction of France’s 9.6% unemployment rate (versus a ratings peer median of around 4%),” notes Fitch.
For more information on the European markets, visit our Europe category.