The Eurozone saw a strong start to the year thanks to economic improvement and upbeat corporate earnings. The economy grew 0.5% sequentially in Q1 of 2017, meeting market expectations. The region also expanded faster than the U.S. in 2016 for the first time since 2008.
As per the EU Economic and Financial Affairs Commissioner, GDP growth expectations for the 19-country bloc for 2017 ticked up to 1.7%, up from 1.6% forecast earlier. The growth forecast for 2018 was kept the same at 1.8%.
In early May, Reuters noted that about a third of the MSCI Europe companies came up with its first-quarter results, wherein corporate profit growth in the region was almost as healthy as that of the U.S. The net earnings beat ratio was 23% in early May, which makes 1Q17 “the best quarter in a decade.” The extent of revenue beat was “the strongest ever on 14 years of data.”
If this was not enough, Eurozone's second largest economy – France – chose Centrist and business-friendly candidate Emmanuel Macron as its president in a run-off election in early May. With this, France followed the footsteps of the Dutch election and discarded populism. All these checked the growing upheaval in the European politics to a large extent (read: French Election Soothes Sentiments: ETFs Likely to Benefit).
Soaring Returns & Assets
The net result is Vanguard FTSE Europe ETF’s VGK 17.2% year-to-date returns, and iShares MSCI Eurozone’s EZU19.1% year-to-date returns, against SPDR S&P 500 ETF Trust’s SPY 6.6% gains realized so far this year (as of May 19, 2017) (read: Do Europe ETFs Have More Upside?).
As perBloomberg, assets invested in the $2.2 billion iShares Core MSCI Europe ETF IEUR have surged 155% since December 2017. VGK saw asset growth of 14% during the same timeframe. As per Financial Times, Europe’s mutual funds saw a net €210 billion in investment in the first three months of this year, marking the highest quarterly inflows in five years.
Europe ETFs to Play
The European Commission also indicated that growth in Germany, the bloc’s largest economy, will rise to 1.9% in 2018, and Spain and Portugal will also grow faster than earlier expected. This GDP growth trend is palpable in the Q1 scorecard.
On the basis of the growth trend and valuations of funds, below we highlight a few Europe ETFs that could turn out to be solid picks. These funds have a lower P/E than the S&P 500-based ETF SPY’s (the gauge of the U.S. equity market) P/E of 18.18 times.
Wisdomtree Europe SmallCap Dividend Fund DFE – P/E 13.59x
Since small-cap stocks reflect more of the domestic economy, a pickup in the major Eurozone countries should favor this ETF. DFE yields about 3.44% annually, which makes it a compelling bet in a region where a low rate environment is prevailing.
SPDR MSCI Spain StrategicFactors ETF – P/E 14.51x
Economic development has been pretty upbeat in Spain lately. The economy grew 0.8% in Q1 sequentially, after 0.7% growth in the prior period and beating market expectations of 0.7%. The fund yields about 3.14% annually (read: 5 Best ETF Areas of March).
Global X MSCI Portugal ETF PGAL – 16.98x
The Portuguese economy grew 1% sequentially in Q1 of 2017. This marked the fastest growth since Q1 of 2010 and followed an upwardly revised 0.7% growth in the prior period.
First Trust STOXX European Select Dividend Index Fund FDD – 14.46x
This ETF follows the STOXX Europe 600 Index which focuses on high-yielding European securities. Stocks from the U.K., France and Switzerland account for about two-third of total assets. The fund yields about 4.37% annually (read: Don't Sell, Buy 4 High Dividend ETFs Under $20 in May).
iShares MSCI Italy Capped ETF EWI – 16.03x
Italian stocks have been one of the best performers in recent sessions. Though the economy is struggling, its beleaguered banking sector seems to have improved. The recovering Eurozone overall is also benefiting Italian assets, as per analysts.
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