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France ETF Unfazed by Credit Downgrade


The iShares MSCI France Index Fund (EWQ) was little-changed in U.S. trading Tuesday morning after Moody’s stripped the country of its triple-A rating.

The credit rater cited France’s diminished long-term economic growth outlook, fiscal situation and susceptibility to “future euro area shocks.”

On Monday before the Moody’s downgrade, Russ Koesterich at BlackRock, which manages EWQ, upgraded France to overweight from neutral. Separately on Monday, the firm named Koesterich its chief investment strategist.

“The main reason is because French equities are now looking attractively valued. At a price-to-book multiple  of 1.14, France is 14% below its 5-year average, and is offering a 31% discount to the MSCI World Index, and a 15% discount to Germany,” he wrote at the iShares blog.

“True, France’s growth prospects look lackluster, with a forecast of 0.4% (recently revised downward) by the European Commission and IMF. Still, in our view, the ’recession discount’ is already priced in,” he added.

The $414 million France ETF is up about 12% so far this year.

Downside risks remain within the banking sector, but the broad French market is well diversified with no single sector accounting for more than 16% of the MSCI France Index, Koesterich said.

“With lingering uncertainty over the Greek bailout as well as the timing for Spain to request assistance through the European Stability Mechanism, I remain cautious on southern European equities. Instead, I look to the less sensitive and undervalued core markets. And I would include France in that category now,” he wrote.

iShares MSCI France Index Fund

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.