Europe ETFs: Investors shouldn’t write-off European companies

Nov 14th, 2011 | By | Category: Equities

Talk to an American about Europe and there’s a good chance they’ll describe a wasteland beset by protests, strikes, austerity and calamity. Europe, they believe, is bust, exhausted, kaput.

Europe ETFs: Investors shouldn’t write-off European companies

Despite eurozone woes, European companies should not be written off permanently.

Clearly, Europe has problems. Greece, Portugal and Ireland have all received bailouts and, more worryingly, Italy and Spain teeter on the edge. With 10-yr yields recently surpassing 7% and hundreds of billions of euros of bonds maturing next year, Italy’s debt, in particular, is fast becoming unsustainable.

Even the existence of the euro itself is being questioned by commentators and politicians. The spectre of messy defaults, bungling politicians and a disintegrating currency certainly lends credence to the ‘wasteland’ perspective.

Reports of Europe’s death are greatly exaggerated
However, while few strategists are currently advising investors to pile in and overweight Europe, many suggest maintaining at least some exposure to the region. After all, despite a steady flow of negative headlines, not everything in Europe is doom and gloom.

Indeed, to borrow a phrase from Mark Twain, reports of Europe’s death are greatly exaggerated. And, as outlined below, Europe, by some measures, offers value and could represent opportunity for the long-term contrarian investor.

Headlines describe Europe in the midst of a debt crisis, but Europe’s aggregate deficit and debt levels actually compare favourably with America’s.  The EU’s aggregate debt-to-GDP ratio and budget deficit are approximately 80% and 6.4%, respectively. In contrast, the US has a debt-to-GDP ratio of 84% and a budget deficit of 8.7%.

And while everyone agrees that the PIIGS (Portugal, Italy, Ireland, Greece and Spain) are in a perilous state, their individual circumstances vary markedly.  Italy, for example, has vast debts of circa €1.9 trillion but has a relatively modest budget deficit; Spain has an unsustainable budget deficit, but a relatively moderate level of national debt, at about 65% of GDP; Greece has both an unsustainable deficit and a high debt level, though represents only about 2.5% of eurozone GDP.

The financial positions of Germany, France, UK, Netherlands and Finland are stronger. Other European countries such as Norway, Sweden, Denmark and Switzerland are in rude health. These stark variances in economic strength highlight the naivety of tarring the whole of Europe with the same brush.

European companies are in good health
Importantly, European corporates are in much better shape than the nations in which they are based. European companies have strong balance sheets – Stoxx Europe 600 Index companies are estimated to hold $690 billion in cash – and derive a large proportion of their sales from outside of Europe, with an increasing share coming from fast-growing emerging markets.

Owing to globalisation, where a business is domiciled is far less meaningful than it was a generation ago. But in this time of intense fear about the future of Europe, the stocks of all European companies have been indiscriminately dragged down.

Yet Europe has created many world-leading companies. France and Italy are home to the world’s finest luxury brands; Germany boasts an impressive manufacturing sector, which includes a superb automotive industry; the UK harbours many of the world’s biggest mining, oil & gas and pharmaceuticals companies. Right across Europe there are hosts of best-of-breed companies. Investors would be foolish to write them all off.

Valuations are also cheap. The MSCI Europe Index has a PE ratio of just 9 and a dividend yield of 4.7%. While economic indicators point to slowdown in 2012, these valuations suggest that recession is already priced in.

Plus, new research by Nomura suggests it’s not all bad. Eurozone unit labour cost growth, they say, is now below that in the US. In the past, movements in the relative growth of unit labour costs in Europe and the US have had a bearing on the relative growth rate of profits in the two regions. If this historical relationship re-asserts, European profits may begin to surprise compared with their US peers.

So while European countries undoubtedly face immense difficulties, European companies are in far better shape. If the ECB steps up to the plate and acts as lender of last resort and national governments enact much needed structural reforms, European equity ETFs – far from collapsing – could deliver healthy returns over the long term.

Specialist/proprietary European ETFs

Ossiam ETF iStoxx Europe Minimum Variance

The aim of the Ossiam iStoxx Europe Minimum Variance ETF is to deliver the net total return performance of a selection of stocks, from the Stoxx Europe 600 Index that are the most liquid and weighted to minimize the volatility of the total portfolio (optimal weights).

Source Man GLG Europe Plus ETF

The Source Man GLG Europe Plus ETF is designed to track the Man GLG Europe Plus Index, which is a long-only European equity portfolio based on the best trading ideas from approximately 60 brokers.

PowerShares FTSE RAFI Europe Fund

The PowerShares FTSE RAFI Europe Fund is based on the FTSE RAFI Europe Index, which is designed to track the performance of the largest European equities, selected based on the following four fundamental measures of firm size: book value, income, sales and dividends. The equities with the highest fundamental strength are weighted by their fundamental scores.

MSCI Europe Index ETFs
The MSCI Europe Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe. The MSCI Europe Index consists of the following 16 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.


iShares MSCI Europe     

CS ETF (IE) on MSCI Europe

Source MSCI Europe ETF


Amundi ETF MSCI Europe

db X –tracker MSCI Europe Index ETF

Stoxx Europe 600 ETFs
With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalisation companies across 18 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Ossiam ETF Stoxx Europe 600 Equal Weight

db X –tracker Stoxx Europe 600 ETF

EasyETF Stoxx Europe 600

Stoxx Europe 50 Index ETF
The STOXX Europe 50 Index provides a representation of blue-chip, supersector leaders in Europe. The index covers 50 stocks from 18 European countries: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

iShares Stoxx Europe 50


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