Busy Timeline For 2017 Eurozone ETFs
The eurozone is in the middle of a political upheaval. Faced with several crucial elections amid a brewing wave of populist ideas, and an ongoing banking crisis, portfolio managers have plenty to digest in 2017.
Risks abound, but that doesn’t mean exposure to Eurozone equities has been all bad. On the contrary, valuations are very attractive, according to Allianz Global Investors’ CIO Joerg de Vries-Hippen. Key economies have also shown some strength, he said, delivering ETF investors pretty good returns, particularly from a currency-hedged perspective.
Consider the 12-month returns of two eurozone-focused ETFs, the $7.6 billion iShares MSCI Eurozone ETF (EZU) and the $9.1 billion WisdomTree Europe Hedged Equity Fund (HEDJ):
Chart courtesy of StockCharts.com
According to Vries-Hippen, investors should return en masse to eurozone equities once the region goes through all of its elections, and the currency block comes out unscathed on the other side.
On the calendar, there’s plenty going on in the eurozone this year, and uncertainty is the only certainty for now. In a recent commentary, ETF issuer Rex Shares summarized the broad political picture best:
“Last year proved how difficult elections were to forecast, and elections in 2017 may prove no easier. Britain's vote to exit the EU in June 2016 and Donald Trump's election in November 2016 may both be behind us, but populist movements in Europe continue to gain momentum and call for drastic political change this year. While ultimately the stock market recovered from both these events in 2016, sustained political uncertainty in 2017 may precipitate quite a different outcome.”
Beyond election polls, there’s also the issue of fragile economies still reeling from a multiyear debt crisis. Here, think tank Stratfor offered the insight that, at the end of the day, fading investor confidence could hold the key:
“The debt crisis exposed the existence of a "doom loop" created by the tendency by European banks to hold their home government's debt. The vicious circle of the doom loop could start with markets losing faith in a government's ability to pay back debt, precipitating a selloff of its bonds. The resulting drop in bond prices would hit the balance sheets of the banks that hold them, making them more likely to need a bailout from their government. This, in turn, could depress investor confidence further, leading to more selloffs that further damage the banks. Despite the danger those practices pose, eurozone regulators have yet to find a way to sever the loop.”
Here are some of the key political events taking place in Europe this year, and what the implications are for some of the projected outcomes:
Dutch Elections On March 15
The Netherlands are known for its liberal government. But this time around, it’s a far-right political party led by Geert Wilders that seems to be leading in the parliamentary race. The agenda is anti-immigration, and nationalist, according to news reports. It’s the type of leadership that fuels ideas of a possible Dutch break with the eurozone.
French Election On April 23
France too has a populist candidate, Marine Le Pen, in the lead to replace President Francois Hollande, and one who’s fueling talks of a France break with the eurozone. Two of the left-leaning candidates opposing Le Pen are now in talks to join forces in an effort to defeat her in the polls, according to news reports. The election should lead to a second round of voting in early May.
Possible Italian Election This Summer
Italy isn’t scheduled to have general elections again until May 2018. But last year’s resignation of Prime Minister Matteo Renzi following his defeat in a constitutional referendum could lead to an early vote sometime this year. Changes to the electoral law recently approved have left the door open for a 2017 election. For now, Italy’s president Sergio Mattarella has nominated Paolo Gentiloni as prime minister.
German Election On Oct. 22
A populist group is challenging Angela Merkel to the post of chancellor. Germany has been a central player in the eurozone, and the outcome of the election will be crucial to markets globally. There’s a growing anti-immigration, nationalist view also brewing in Germany.
Brexit Implementation
Following last year’s surprising British vote to leave the eurozone, the British parliament is now faced with a Brexit bill detailing the actual plan to break with the eurozone. According to news reports, the government is looking for a final bill approval by early March.
Greek Debt Payment Due In July
Greece has been at the epicenter of the eurozone’s debt crisis since 2009. There’s a lot of water under this bridge in both political and economic fronts, but the bottom line is that Greece is still negotiating the terms of its bailout, as the country faces a looming payment due this summer. Lenders are said to be calling for more austerity measures in Greece.
Lots Of ETFs In This Space
The outcome of all these events this year will directly impact the outlook and the performance of Europe-focused ETFs.
Today there are at least 111 equity and currency funds focused exclusively on the region, and they command about $55 billion in assets under management. A complete list of these ETFs can be found in our Europe ETFs Channel.
Almost no one predicted Brexit would happen, or that Donald Trump would win the U.S. presidency. Now, there’s plenty more uncertainty stemming from a busy calendar in the eurozone this year.
Contact Cinthia Murphy at cmurphy@etf.com
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