European equity ETFs stage strong start to 2017

Feb 27th, 2017 | By | Category: Equities

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Investors in European equity ETFs have enjoyed a bullish start to the year as local companies have gained ground amid positive economic and corporate earnings data.

European equity ETFs stage strong start to 2017

The MSCI Europe Index is up around 2.9% year to date in EUR terms.

The MSCI Europe Index is up around 2.9% year to date in EUR terms, reflected in a range of ETFs tracking the index.

The largest Europe-listed ETF to track the MSCI Europe Index, the €5.7 billion iShares MSCI Europe UCITS ETF (LON: IMEU), is up 1.8% year to date in sterling terms, and has soared 28.7% over 12 months, partly due to the weakening of the pound versus the euro since Brexit. It tracks 448 holdings with 20.5% in financials, 13.7% in consumer staples and 12.8% in industrials. It has a total expense ratio of 0.35%.

The second largest ETF providing broad European exposure, the €5.7bn iShares STOXX Europe 600 UCITS ETF (Xetra: EXSA) is up 3.2% in euro terms since the New Year and has risen 18.5% in 12 months. The fund tracks 602 stocks, with 20.7% in financials, 13.7% in industrials and 13% in health care stocks. It is cheaper than IMEU with fees of 0.20%.

Last year Eurozone GDP rose by 1.7%, buoyed by European Central Bank stimulus programs and a weaker currency which boosted exports. It was the first time the region’s GDP growth had exceeded the US since the credit crisis struck in 2008 – although it marked a slowdown from Europe’s 2015 rate of growth.

Global growth will especially benefit European-based companies as about half of their revenue is exposed to overseas markets, compared to about 40% of S&P 500 companies. In the last quarter of 2016, Eurozone earnings grew for the first time in four years. Rising commodity prices and interest rates, when they come to pass, are expected to provide a boost to the earnings of large mining companies and banking firms respectively.

Eurozone stocks are also looking relatively more attractive compared to the US market in terms of fundamental pricing metrics. The Euro Stoxx 50 is trading at a forward P/E ratio of 12.8 versus 15.8 for the S&P 500 as of 15 February.

Headwinds remain for the Eurozone, however, after three years of modest growth.

Mario Draghi, President of the ECB, said in a news conference that there has been a pickup in growth but that “the risks surrounding the euro area growth outlook remain tilted to the downside and relate predominantly to global factors.”

Political uncertainty also remains a factor in 2017, with elections in France, Germany, and the Netherlands as key events to watch unfold. There are also question marks over the effect of newly-elected US President Donald Trump and whether he will follow through with his vow to take a more isolationist stance when it comes to trade.

Figures released in January by the European Union’s statistics agency, Eurostat, showed that consumer prices were 1.8% higher than a year earlier, the highest rate of inflation in four years. Rising prices without corresponding wage growth could dampen consumer spending, an important support for the economy.

There are over 200 ETFs listed in Europe that provide broad exposure to European-based stocks, including smart beta funds and ETFs that fall under the socially responsible investment category.

Source offers its Euro Stoxx 50 UCITS ETF (LON: SX5S) for just 0.05% in fees while the cheapest fund tracking the MSCI Europe Index is the Amundi MSCI Europe UCITS ETF (LON: CEUR) at 0.15%.

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