Tuesday, June 6, 2017

Catalysts Abound for Europe ETFs (EZU)

At least two themes pertaining to Europe exchange-traded funds (ETFs) are becoming more apparent as 2017 rolls along. First, Europe ETFs are soundly outpacing U.S. equities. For example, the iShares MSCI Eurozone ETF (EZU
iShs MSCI Eur Shs
) is up 19.7 percent year to date, topping the S&P 500 by better than a two-to-one margin. Second, investors are returning to Europe ETFs in force. In the case of EZU, the ETF is one of the top asset gatherers this year. Last year, investors yanked $34 billion from Europe ETFs, but as of May 19, Europe ETFs have hauled in $20 billion year to date.

Europe ETFs have outperformed and attracted new capital amid concerns about political volatility. For example, France, the Eurozone's second largest economy, wrapped up a presidential election last month, while the U.K. heads to the polls later this week. The European Central Bank (ECB) also meets this week. Additionally, Germany and Italy, the Eurozone's largest and third largest economies, respectively, head to the polls later this year. (See also: After French Election, What's Next for Europe?)
Amid increasing global reflation, BlackRock, Inc. (BLK
BlackRock Inc
), the world's largest asset manager, is bullish on European equities. "In particular, we see the traditional powerhouses of European growth like Germany and France (who together account for half of Euro area GDP) as likely to surprise to the upside of the consensus estimate," said BlackRock in a recent note. "Together with a lessening of political risk in Europe, leading indicators like PMIs​, demand for loans and sentiment surveys are all pointing higher, which suggest a sustained improvement." France and Germany combine for almost 62 percent of EZU's weight. The ETF excludes U.K. stocks, a strategy BlackRock favors because the firm is positive on ex-U.K. European equities.

Another reason investors are turning their attention to Europe is value. Various valuation metrics confirm that European stocks look like bargains relative to U.S. equivalents. "The MSCI Eurozone ranks only in the 66th percentile of its historical valuation, and forward price-to-earnings levels are 11 percent below their 2015 peaks," said BlackRock. "By contrast, the S&P 500 ranks in the 80th percentile of its historical valuations (with forward P/E levels at 2001 tech bubble levels). In forward P/E terms, Europe is also at a 16 percent discount to the S&P 500, and a 7 percent discount to the MSCI ACWI. Moreover, in terms of price to book values, Europe is at an even steeper discount (47 percent vs. the S&P 500 and 26 percent vs. the MSCI ACWI)."
In the U.S., nearly 190 ETFs are up at least 20 percent year to date, and about 25 of those funds are dedicated Europe funds, including single-country offerings. (See also: A Compelling Catalyst for Europe ETFs.)

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