Is Europe ETFs Rally Over? - ETF News And Commentary
Investing in European equity market fell out of investors’ favor last week primarily due to the new-found strength in the common currency euro and overvaluation concerns over the equity markets raised by the Fed. To add to the worry, renewed tensions over the Greek debt deal saga, which has the potential to ruin the future of the common currency, are weighing on the European stocks.
Meanwhile, a delayed Fed rate hike back home pressured the greenback which in turn favored oil prices. Investors should note that the oil price rout has been a major pocket of weakness since the last 10 months and is the root cause of global deflationary pressures.
Now with energy prices on the mend and the ECB pursuing the QE measure with several other nations putting stress on easy money policies, the dark cloud over inflation seems to disperse. This has bothered the global treasury market as prices of long-dated bonds, from the U.S. to Europe took a dive lately and yields touched the highest point of this year.
Some analysts believe that diminishing fears of the Euro zone deflationary worries might be causing investors to take it as the cue of faster-than-expected policy tightening. Except iShares MSCI Switzerland Capped ETF (EWL), all Europe equities ETFs were in the red in the last five trading sessions (as of May 6, 2015).
Investors should note that the euro against the greenback was up 7.3% (as of May 6, 2015) since the low recorded for this year in mid March. This was in contrast to the ECB president’s intention to weaken the currency and boost the region’s export.
Notably, earlier this year, the ECB had announced a bond-buying program worth €1.14 trillion ($1.16 trillion) to reboot the waning Euro zone over the next one and half years (read: Europe ETFs in Focus after ECB and Swiss Action).
Given the ECB easing, European equities ETFs enjoyed a bull run in the first four months of 2015 with db X-trackers MSCI Germany Hedged Equity Fund (DBGR) returning the highest at 15.6% (as of May 6, 2015) followed by 14.9% return offered by Europe Hedged Equity Fund
(HEDJ)(read: Bulls Riding Europe with These Top Ranked ETFs).
Is the Sell-Off an Entry Point?
The European Commission has now upgraded Euro zone economic growth to 1.5% for 2015 from 1.3% guided three months before. However, the forecast for 2016 is reiterated at 1.9%. The Commission now expects inflation of 0.1% in 2015 versus 0.1% of decline projected earlier. The year 2016 is likely to see inflation of 1.5%, slightly up from 1.3% expected previously.
The bullish story has more to say. The Commission upgraded the job growth outlook. For 2015 and 2016, joblessness in the Euro zone is expected to be 11% and 10.5% respectively, down from previous projection of 11.2% and 10.6%. Apparently, the ECB initiatives look quite successful in boosting the struggling region.
Given a flurry of upgrades, there is reason to be worried on the Euro zone rally. After all, the dovish ECB is here to stay till September 2016 and is less likely to tighten until the economy regains its lost ground.
So, investors might consider the latest dip as an entry point to the space. Yes, overvaluation is a concern with HEDJ trading on par with the broader U.S. ETF (SPY). Both carry a P/E (ttm) of 18 times presently.
Germany ETFs had also enjoyed a surge in investors’ interest so far and have succumbed to a correction now. Most Germany ETFs are trading at a P/E of 16 to 19 times even after the recent sell-off (see all European Equity ETFs).
Here at Zacks, we have many top-ranked Europe ETFs. Investors still unsure about the future movement of euro might consider un-hedged versions of Europe ETFs at the current level. iShares MSCI Europe Minimum Volatility ETF (EUMV), Vanguard FTSE Europe ETF (VGK) and iShares MSCI EMU ETF (EZU) are some of the intriguing options having a Zacks ETF Rank #2 (Buy) that are free of the recent euro strengthening risks.
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ISHARS-SWITZERL (EWL): ETF Research Reports
DEUTS-XT MS GER (DBGR): ETF Research Reports
WISDMTR-I HE FD (HEDJ): ETF Research Reports
SPDR-SP 500 TR (SPY): ETF Research Reports
ISHARS-MS EU MV (EUMV): ETF Research Reports
VANGD-FTSE EUR (VGK): ETF Research Reports
ISHARS-EMU IDX (EZU): ETF Research Reports
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