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Concerns Mount for Eurozone ETFs

This article was originally published on ETFTrends.com.

The iShares MSCI EMU ETF (Cboe: EZU) is down just 1.24% year-to-date, but some market observers are highlighting Eurozone-specific concerns, such as Italy's new government, as issues for the region's financial assets to contend with.

The slowing Eurozone growth in recent months coupled with unease over the stability of the European Union as the anti-establishment Five Star Movement and far-right League formed a government in Italy fueled concerns over Eurozone assets. Furthermore, rising trade tensions as the Trump administration escalates protectionist rhetoric also weighed on the export-heavy Eurozone market.

“We see a limited risk of near-term flare-ups but are skeptical about the Italian government’s commitment to fiscal discipline and Europe’s ability to cope with the next downturn,” said BlackRock in a recent note. “We see better risk-return tradeoffs in non-EU assets.”

EZU, which tracks the MSCI EMU Index, holds 250 stocks. Approximately 63% of the fund’s geographic weight is allocated to France and Germany, the Eurozone’s two largest economies.

Regional Worries

Added trade concerns heightened the geopolitical risk in the market, which has been having a headache over Italy and the country’s high debt levels as it preps for a budget that could run counter to the EU’s deficit rules.

Investors previously dumped Italian bonds over the summer over concerns the new governing coalition’s fiscal plans would further strain the country’s already huge budget deficit. Specifically, government ministers pledged to enact a minimum income for the poor, cut down a previous pension reform and diminish taxes in the forthcoming 2019 budget, which fueled concern over the government’s ability to pay for these programs.

“Italian assets have taken a hit this year. The selloff was sparked by fears that Italy’s populist government would breach the EU’s key budget deficit limit of 3% of gross domestic product (GDP), as the two major parties in the new governing coalition had vowed to cut taxes and boost welfare spending in their campaign,” said BlackRock. “Italian assets have recouped some losses recently, only after Rome repeatedly assured it would respect EU rules in its soon-to-be released budget. We see scope for a further recovery in Italian asset prices, but do not see them returning to pre-election levels anytime soon.”

Italy, the Eurozone's third-largest economy, is 7.25% of EZU's weight.

For more information on the European markets, visit our Europe category.