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Are Alarm Bells Ringing for These Europe ETFs?

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In its latest update to its Global Economic Outlook, the International Monetary Fund (IMF) has kept the expected global growth rate for this year unchanged but raised concerns about future momentum.

The growth clip this year may be the fastest since 2011, but less-than-expected growth in the Euro zone and Japan may ease the momentum. IMF already cautioned that Trump’s tariffs could cut global growth by 0.5% by 2020.

The IMF has now lowered its growth projection for the Euro area, which is now expected to expand 2.2% this year, down 0.2 percentage points from the IMF’s previous forecast, in April. The common-currency bloc will likely expand 1.9% next year, down 0.1 percentage points from April.

Among the Euro zone, the IMF warned that economic growth in Germany, France and Italy – the big three – would be squeezed by 0.3% this year. Italy and France are likely to witness their growth slip even in 2019.

iShares MSCI France ETF (EWQ)

The French economy advanced 0.2% sequentially in Q1 after a 0.7% expansion in the previous period. It was the most sluggish pace of expansion since the September quarter of 2016.

The Bank of France reiterated its forecast for French GDP growth for the second quarter at 0.3% and expects a general uptick in business activity for July. However, a stronger euro, a rebound in oil prices and uncertainty about protectionism are likely to curtail the growth momentum.

Economic growth this year may fail to meet the government’s 2% forecast and is likely to remain sluggish in the years after, per the Bank of France. Notably, the economy scored a 2% growth rate last year, marking a six-year high.

Though the fund has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook thanks to better projections for the second -quarter and even for July, the long-term outlook appears murky.

iShares MSCI Germany ETF (EWG)

The German economy expanded seasonally-adjusted 0.3% sequentially after 0.6% growth in the previous period. It also marked the weakest clip of growth since the September quarter of 2016.

The International Monetary Fund trimmed its 2018 forecast for German GDP growth to 2.2% from 2.5% estimated in April thanks to rising protectionism, growing concerns over a hard Brexit and “a reassessment of sovereign risk in the Euro area.” The bank, however, nudged up its 2019 forecast to 2.1% from 2.0% (read: U.S. Auto Tariff Risk Put These ETFs and Stocks in Focus).

The fund currently has a Zacks Rank #3 (Hold).

iShares MSCI Italy ETFEWI

The Italian economy also grew 0.3% sequentially in Q1, following an upwardly revised 0.4% expansion in the previous period. The IMF cut its growth forecast for Italy, for both 2018 and 2019. After last year's 1.5% rise, GDP will likely expand this year by 1.2%, three percentage points lower than the IMF’s April forecast.

Next year, growth will likely be 1.0%, one percentage point less than what was predicted in April by the IMF. Increasing political uncertainty and the resultant impact on the financial market led the IMF to lower the forecast. The fund has a Zacks Rank #4 (Sell) (read: ETFs to Gain/Lose if Italy Crisis Deepens).

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ISHARS-FRANCE (EWQ): ETF Research Reports
ISHARS-ITALY (EWI): ETF Research Reports
ISHARS-GERMANY (EWG): ETF Research Reports
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