Thanks to ongoing issues in countries like Spain and Greece, the focus of many investors continues to be on the PIIGS group of nations. These five countries—Portugal, Ireland, Italy, Greece, and Spain—are often thought to be some of the weakest members in the euro zone from a financial perspective and are the least prepared to weather the current storm.
This has certainly proven to be the case as of late as a rash of bailouts and downgrades have kept this group in the spotlight and struggling to balance harsh austerity measures with growth initiatives. Meanwhile, bond yields are soaring across the entire region leading many to think that more funds will have to be deployed or that some might be forced to leave the common currency bloc in the near future (see Beyond Germany: Three European ETFs Tracking Strong Countries).
With this backdrop and the lack of consensus over Eurobonds, these nations look to stay in the limelight for a little longer, especially if events slowly deteriorate without any systemic shocks like a sudden ‘Grexit’. Beyond a game-changer like that which might get rich countries with low debt to do more in the crisis, Spain, Italy, and the rest of the bunch could be in a for a rough second half of 2012.
However, while the focus might be on the PIIGS for now, the future worries could belong to a few countries in the broader European region that are very weak but are often overlooked by many market participants. All of these nations have relatively high debt-to-GDP ratios as well as unfortunate budget situations or demographic problems which could cause problems down the road for any of the three (see Three European ETFs That Have Held Their Ground).
Below, we highlight three country ETFs that follow these often overlooked markets. While any of the three may not be in deep trouble right now, they are certainly heading down a dark path and may be the next group of countries to face PIIGS-like fiscal troubles:
Belgium- iShares MSCI Belgium Investable Market Fund (EWK)
Although it may have avoided inclusion in the worst-of-the-worst, Belgium doesn’t exactly have a favorable economic situation. Public debt is approaching 100% of GDP while the country also has a sizable—although not enormous—budget deficit as well.
Beyond this, the country has also had a rash of political issues, although this may be in the past. The country now holds the record for the longest time without a government in modern history, although they now have a Prime Minister (finally). Still, it shows the incredible level of gridlock that can be seen in the tiny nation of Belgium, a situation that could spell trouble if bond vigilantes turn their focus to the country.
For investors focused on Belgium, EWK represents one of the few ways to play the nation. The product tracks the MSCI Belgium Investable Market Index, giving exposure to just under 50 companies while charging 52 basis points a year in fees (See Euro Small Cap ETFs: The Way to Play Europe?).
Consumer Staples make up an outsized portion of the total assets, coming in at 35%, while financials (16%), basic materials (12%), and telecom (10%) round out the top four.
Investors should also note that the product has a heavy concentration in its top securities, and especially so in the number one stock, InBev (BUD). This firm makes up more than 25% of the total assets while the top ten stocks account for more than 70% of the assets in EWK.
United Kingdom- iShares MSCI United Kingdom Investable Market Fund (EWU)
The UK is often overlooked as a trouble spot since the country has enacted austerity measures and it is outside of the euro zone. Due to this, the country is seen as having more flexibility when it comes to policy decisions and thus has been able to skirt by the worst of the turmoil so far.
However, once the euro zone finally gets its house in order, the focus will undoubtedly shift to the UK and its massive current account and budget deficits. While it is true that the country still has an ‘AAA’ rating from the major issuers, two of the three have a negative outlook on the country while the recent news that the UK has fallen back into a recession hasn’t helped matters either.
To play this trend, investors have EWU, the popular iShares fund that tracks the MSCI United Kingdom Index. This benchmark has about 100 securities in total and charges investors 52 basis points a year in fees (see UK ETF Investing 101).
In terms of sectors, the product is well spread out, with energy (19%), financials (17%), and consumer staples (17%) all taking up a good chunk of the assets. The product is, however, focused on large caps while it does pay a robust yield coming in at 3.9% in annual yield terms.
France- iShares MSCI France Investable Market Fund (EWQ)
Arguably the eventual worst of the three, France has a host of problems that only look to be made worse in the long run by the new leadership in the country. At a time when many other nations are looking at cutting back the state, Hollande looks to expand its role in the French economy, raising taxes on the ultra-wealthy and lowering the retirement age for many workers.
While this might be great in the short term, France is running a current account deficit, a large budget deficit, and a public debt level that is approaching 90% of GDP. Given these factors and the sheer size of the French economy, even a small uptick in bond yields could be devastating, especially if the budget deficit continues to grow in size or if the country suffers a credit downgrade (read Play Europe with this ETF Pair Trade).
With these trends in focus, investors should definitely keep a close eye on EWQ, a fund that tracks the MSCI France Investable Market Index. This benchmark has about 73 securities in its basket while charging investors 52 basis points a year in fees.
Top sectors include industrials (16%), consumer discretionary (13%), and health care (13%), although energy, staples, and financials, all account for over 10% as well, suggesting a diversified fund. This is—to a degree-- reflected in the individual holdings of the product, although it should be noted that EWQ does devote more than 10% to both Total (TOT) and Sanofi (SNY) in its portfolio.
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