5 Reasons to Bet on Eurozone ETFs Now
Although Wall Street is inching closer to an all-time high, uncertainties regarding the timing of the Fed rate cuts and overvaluations are lingering. Meanwhile, several foreign economies have lately shown improving trends.
Among the ones with high potential for outperformance, the Eurozone deserves a mention. Several factors contribute to this improved outlook. First-quarter GDP readings have exceeded expectations, indicating a stronger-than-anticipated start to the year.
Additionally, inflation is approaching the European Central Bank's target of 2%, and the ECB itself is poised to initiate interest rate cuts, signaling a supportive monetary policy stance. Let’s discuss the positive factors in detail.
ECB Rate Cuts Almost Sure
The latest minutes from the European Central Bank (ECB) suggest a likely monetary policy in June. Although most members favored keeping rates stable for now, some had already pushed for rate cuts in April.
The minutes from the April meeting revealed that the financial markets are prepared for a possible rate cut in June, provided the upcoming economic data aligns with the current forecasts. ECB President Christine Lagarde has also echoed the same positive sentiment, affirming that the eurozone economy is on a path of recovery.
Falling Inflation & Improved Growth Outlook for Euro Zone
The annual inflation rate in the Euro Area remained at 2.4% in April 2024, in line with market expectations, preliminary estimates showed. The core inflation rate, which excludes volatile food and energy prices cooled to 2.7%, down from March's 2.9%.
Analysts in a recent Bloomberg poll have revised their forecasts for the Euro area economy, anticipating a faster expansion in 2024 compared to the previous projections. The latest consensus suggests a 0.7% increase in output for the 20-nation currency union, up from the previously forecast 0.5%. The upgraded forecasts reflect a more optimistic sentiment in the region.
Ailing German Economy Showing Signs of Improvement
Notably, Germany, the largest economy in the Eurozone, is expected to see a GDP increase of 0.2%, up from the earlier estimate of 0.1%. Germany's economy expanded by 0.2% in the first quarter of 2024, above market expectations of a 0.1% increase and after a 0.5% contraction in the previous period. On a year-on-year basis, the economy contracted 0.2%, entering a technical recession for the first time since 2020-21, per tradingeconomics. Moreover, positive revisions have also been seen for France, Italy and Spain.
Improving Corporate Earnings Backdrop
A weaker euro and stronger PMIs are expected to boost earnings revisions in Europe, per UBS, as quoted on CNBC. “European profit margins (critically, ex financials) are far less extended than the US, and in the US 67% of the margin improvement came from unsustainable factors (lower rates and lower tax) compared to just 3% in Europe,” the strategists wrote.
Cheaper Valuation
The S&P 500-based fund SPDR S&P 500 ETF Trust SPY has jumped 26% over the past one year while Vanguard FTSE Europe ETF VGK has gained 9.4% and iShares MSCI Eurozone ETF EZU has added 12.9%. The fund SPY has a P/E of 17.86X while VGK has a P/E of 13.00X. The fund EZU has a P/E of 13.23X. With the monetary policy easing looming in the cards, a cheaper valuation will likely give Eurozone ETFs an edge over the U.S. market.
Moreover, UBS indicated that the so-called equity risk premium (ERP) — or the excess return on investing in stocks compared to risk-free alternatives — is far higher in Europe than the United States, as quoted on CNBC. UBS went on highlighting that the ERP in Europe is 2.1 percentage points above the United States, close to a record high.
ETFs in Focus
Against this backdrop, investors can keep a track of the Euro zone ETFs like iShares MSCI Denmark ETF EDEN (up 4.4% past week), Franklin FTSE Germany ETF FLGR (up 2.4% past week), iShares MSCI France ETF EWQ (up 2.3% past week), iShares MSCI Austria ETF (EWO) (up 2.3% past week), SPDR EURO STOXX 50 ETF FEZ (up 3% past week) and iShares MSCI Eurozone ETF EZU (up 3% past week).
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SPDR S&P 500 ETF (SPY): ETF Research Reports
iShares MSCI France ETF (EWQ): ETF Research Reports
SPDR EURO STOXX 50 ETF (FEZ): ETF Research Reports
iShares MSCI Eurozone ETF (EZU): ETF Research Reports
Vanguard FTSE Europe ETF (VGK): ETF Research Reports
iShares MSCI Denmark ETF (EDEN): ETF Research Reports
Franklin FTSE Germany ETF (FLGR): ETF Research Reports
