With political risk muted, at least for the moment, and European stocks looking attractively valued relative to their U.S. counterparts, investors have multiple reasons to consider the region's equities and exchange traded funds such as the SPDR EURO STOXX 50 ETF (FEZ).
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The Importance Of Politics
Proving that eurozone politics are an important catalyst for the region's stocks ETFs like FEZ, FEZ is higher by nearly 19 percent year to date and has been soaring since the recent French presidential election. Leftist candidate Emmanuel Macron emerged victorious and while Macron has leftist if not socialist leanings, his victory was the desired result for French assets and European equities in general.
The result was also important to FEZ because the ETF allocates over 36 percent of its weight to French stocks, making the eurozone's second-largest economy the fund's largest country exposure. Importantly for Europe ETFs, such as FEZ, European economic growth is improving and finally gaining steam against the U.S.
In fact, in the first quarter of 2017, Eurozone GDP grew at an annual pace of 1.8 percent, while the US posted 0.7 percent growth, said State Street Global Advisors (SSgA) in a recent note. Admittedly, these are not long-term trend numbers but still suggest a potential shift in momentum, driven by strengthening fundamentals and, potentially, by changes in political leadership. In addition, in the latest European Markit Purchasing Managers Index (PMI) with both manufacturing and service sectors at multi-year highs we find encouraging signs of a performance gap opening relative to the US.
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FEZ allocates just over a third of its weight to German stocks and investors should be mindful of the fact that the eurozone's largest economy holds national elections later this year. The same is true of Italy, the third-largest eurozone economy, underscoring the point that political volatility in the region could potentially flare up again.
FEZ features exposure to eight countries, but the ETF is top heavy with France, Germany and Spain combining for about 80 percent of the ETF's geographic roster.
Financial services and industrial stocks combine for over 36 percent of the sector weights in FEZ. The ETF allocates another 22.3 percent of its roster to consumer sectors, highlighting the ETF's leverage to improving eurozone economic trends.
But from a broad, regional asset class perspective, when we look at price-to-book value (P/B) adjusted for sector comparability across regions, we see that Europe is trading 33 percent below the US on a P/B basis. This is one of the deepest discounts in 20 years a period that includes two recessions and the debt crisis, said SSgA.
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