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Outlook for French ETFs Ahead of First Presidential Debate

EWQ HFEZ HEZU

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According to a poll on the eve of the French presidential debate, centrist frontrunner Emmanuel Macron is expected to lead the first round of the elections on April 23, 2017. Macron is expected to win 26.5% of the votes, marginally ahead of his far-right opponent, Marine Le Pen with 26% share. The poll further predicts that he would beat Le Pen 64-36 in the run-off on May 7, 2017.
 
The former frontrunner, Francois Fillon is expected to lose in the first round of elections, with 19% of the votes. He is expected to fall short of the centrist candidate because of the controversy regarding payments made to his wife and children for services they apparently did not perform. He was also involved in a controversy regarding accepting loans from the rich.
 
Macron is expected to be the pick of his opponents in the debate owing to his lack of experience and former investment banker status, which according to some makes him a prospective President of the elite. He will be attacked by both sides due to his centrist status and the French people will be observing him closely to look at his ability to take attacks and respond to them.
 
The other two candidates participating in the debate are Benoit Hamon from the Socialist party and left-wing Jean-Luc Melenchon, who are at the fourth and fifth positions respectively, according to polls. Though a total of eleven candidates are contesting for the elections, the other six candidates were excluded from the debate owing to lack of adequate support.
 
The debate is scheduled to happen just two days after a man seized a soldier’s weapon at Orly Airport before being killed by officers. In a nation facing terrorism issues, with 230 people dead due to human acts of terrorism in the past two years, Macron is expected to face questions regarding security.
 
Investors are concerned about a potential Le Pen victory, who has promised to hold a referendum to take France out of the EU if she wins. Citigroup Inc. has said that French banks could lose up to 25% in market cap in case such an event happens in the elections.  Polls can be wrong as they have been in the recent past. Hence, completely wiping out the probability of a Le Pen victory will not be wise (read: Are European ETFs a Good Buy Amid Political Uncertainty?).
 
Despite the uncertainty, the following ETFs that offer exposure to France can be considered:
 
iShares MSCI France ETF (EWQ - Free Report)
 
This fund is the only pure play on France available in the market. It is a relatively concentrated fund with over 46% allocated to its top 10 holdings. 
 
The fund manages AUM of $354 million and charges 48 bps in fees per year. The top three sector holdings of this fund are Industrials, Consumer Cyclical, and Financials, having more than 50% of holdings. The threat to the financial sector in France is a potential Le Pen victory, as her victory will lead to a “Frexit” referendum. This fund returned 5.84% in the year-to-date time frame and 10.33% in the past one year. Moreover, this ETF is not currency hedged. This increases the risks of investing in this ETF in case there is an upset in the elections. As such, this ETF has a Zacks Rank #3 (Hold) with a Medium risk outlook. 
 
We would now discuss the currency hedged options to gain exposure to the French economy. However, these ETFs are not pure plays as they have less than 35% exposure to France, with investments in other major Euro nations as well (read: 3 Reasons Why These European ETFs Compelling Bets Now).
 
iShares Currency Hedged MSCI Eurozone ETF (HEZU - Free Report)
 
Even though this fund has investments all over Europe, the highest amounts of assets have been allotted to France, at around 31%
The fund manages AUM of $1.25 billion and charges 50 bps in fees per year. The top three sector holdings of this fund are Financials, Industrials, and Consumer cyclical, having almost 50% of assets allotted to them. This fund returned 6.02% in the year-to-date timeframe and 18.75% in the past one year. As such, this ETF has a Zacks Rank #3 with a Medium risk outlook (read: 3 Reasons to Buy Eurozone ETFs Now). 
 
SPDR EURO STOXX 50 Currency Hedged ETF (HFEZ - Free Report) :
 
This Euro ETF is not a pure play on France. However, the highest number of assets has been allotted to France, at around 36%. 
 
The fund manages AUM of $23 million and charges 32 bps in fees per year. The top three sector holdings of this fund are Financials, Industrials, and Consumer Cyclical, which have almost 50% of the assets allotted to them. This fund returned 5.71% in the year-to-date time frame and 17.68% in the past one year. As such, this ETF has a Zacks Rank #3 with a High-risk outlook. 
 
What to Expect?
 
It can thus be seen that currency hedged ETFs with a broader exposure to the Euro zone economies have been performing relatively better than a pure play ETF on France, which does not hedge against currency movements. Further, shifts in the market are expected post the presidential debate as the contenders wage a war of words with their proposed policies to better their odds of winning. We, therefore, believe it’s best to remain on the sidelines for now as the outcome of poll surveys may be misleading.
 
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