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Time to Invest in Europe ETFs on Falling Inflation?

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The annual rate of inflation in Euro zone dropped from 6.1% in May to 5.5% in June. However, this isn't enough to halt more interest rate hikes, which will increase borrowing costs across the economy. Core inflation, which excludes energy and food, remains stubbornly high and increased to 5.4%. Persistent high prices across the globe have led top central bankers to maintain or even increase rates until inflation aligns with their 2% economic goal.

This stubborn inflation originated from Russia's invasion of Ukraine, worsening energy and food prices. Christine Lagarde, the ECB President, cautioned that inflation is proving stickier than expected. At the bank's annual policy conference, Lagarde, alongside U.S. Federal Reserve Chair Jerome Powell and Bank of England Governor Andrew Bailey, put stress on the fact that rates will increase and remain high until necessary.

Europe ETFs: Still A Bright Opportunity

Despite these concerns, European ETFs present a viable investment opportunity. As high rates begin to slow inflation and stabilize the economy, ETFs tracking European indices can provide robust, diversified exposure to this recovery. Unemployment, for instance, is at a record low of 6.5%.

Though the Eurozone economy unexpectedly shrank 0.1% sequentially in Q1 of 2023, the situation should improve given the fall in inflation. Eurozone's GDP growth is forecast at 0.6% for 2023, per S&P Global. The ECB has already hiked rates eight times in a row, from -0.5% to 3.5%. Rates are way lower than the U.S. economy. A softening inflation may not require very steep rate hikes, going forward.

Cheaper Valuation

“Regional stock markets [of Europe] have been on a good run year-to-date, but remain at a discount both on a historical basis and versus U.S. peers,” said Helen Jewell, as quoted on CNBC, some weeks ago. The P/E ratio of (SPY) is 17.86X currently while SPDR EURO STOXX 50 ETF (FEZ - Free Report) has a P/E ratio of 11.56X even after a stellar run in 2023.

Europe ETFs in Focus

Below we highlight a few Europe ETFs that are in high momentum (as of Jun 29, 2023) (read: Why Europe ETFs May Be Better Bets Than U.S.).

Franklin FTSE Italy ETF – Up 5.9% Past Month

iShares MSCI Spain ETF (EWP - Free Report) – Up 5% Past Month

First Trust Eurozone AlphaDEX ETF (FEUZ - Free Report) – Up 4.7% Past Month

iShares MSCI France ETF (EWQ - Free Report) – Up 3.9% Past Month

SPDR EURO STOXX 50 ETF (FEZ - Free Report) – Up 3.5% Past Month

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