Cyprus, a tiny island nation with a population that is roughly
30 percent smaller than San Diego's, is reminding investors that
all is not well in the eurozone.
Over the weekend, Cyprus' parliament delayed a vote on a bank
deposit levy that would tax deposits of less than EUR100,000 at a
rate of 6.75 percent and deposits north of EUR100,000 at 9.9
percent in an effort to shore up the country's ailing banks.
The delayed vote has sparked fears Cyprus could go bankrupt
and face departure from the eurozone. To be sure, Cyprus is not
Italy or Spain in terms of economic heft in the eurozone. Cyprus
is not even on par with Greece in terms of economic importance in
the region, but a country's size rarely matters when it comes to
the eurozone roiling global financial markets.
Clearly, there are issues for investors considering long
Europe positions to evaluate before jumping in as S&P Capital
IQ points out in a new research note.
"According to Rob Quinn, S&P Capital IQ's Chief European
Investment Strategist, the key drivers of equity valuations in
recent years have been excess liquidity, inflation expectations
and the discount rate," said the research firm. "However, Quinn
believes global equity valuations have already experienced their
quota of re-rating, with the P/E multiples at a multi-year high,
and this may reverse into a headwind over the coming five
quarters. Any further sustainable appreciation from here on in
will require an earnings rebuild, in our view, and thus far in
2013, earnings estimates have been coming down."
Citing recent economic data out of the Eurozone, including
some discouraging purchasing managers index reports, S&P
Capital has unfavorable views on a pair of marquee Europe
. The research firm sees negative implications for the Vanguard
MSCI Europe ETF (NYSE:
) and the iShares MSCI EMU Index Fund (NYSE:
), both which S&P rates as Marketweight.
VGK, which is home to 439 stocks, devotes the bulk of its
weight to non-eurozone nations. For example, the U.K.,
Switzerland and Sweden and combine for over 53 percent of the
according to Vanguard data
Additionally, the PIIGS countries - Portugal, Italy, Ireland,
Greece and Spain - combine for just 8.5 percent of VGK's
Still, France and Germany figure prominently in VGK, making
the fund vulnerable to dour Eurozone headlines. Germany and
France, the region's two largest economies, receive weights of
13.2 percent and 14.6 percent, respectively, in VGK.
The iShares MSCI EMU Index Fund is far more concentrated on
Eurozone equities than VGK. EZU's top-10 country weights, all of
which are Eurozone nations, represent more than 98 percent of the
ETF's weight. Of that group, France and Germany combine for
nearly 62 percent of the fund's total weight. EZU features no
noteworthy exposure to Cyprus or Greece, but Spain and Italy
combine for 17.5 percent of the ETF's weight.
EZU and VGK are each down about one percent on Monday.
S&P Capital IQ is more bullish on the SPDR S&P
International Consumer Staples Sector ETF (NYSE:
), which the research firm rates Market-weight with positive
implications. The SPDR S&P International Consumer Staples
Sector ETF is small ($34.67 million in assets) and thinly traded
(average daily volume of less than 9,100 shares), but just as
investors would expect with a U.S.-focused staples ETF, IPS
delivers in terms of having a low beta.
IPS has a beta of just 0.43 against the S&P 500,
according to State Street data
IPS is home to 112 stocks, including spirits maker Diageo
), which S&P has a four-star rating on. Nestle (OTC:
), the world's largest food company, is the ETF's largest holding
with a weight of 15.2 percent. Other top holdings include
Anheuser-Busch InBev (NYSE:
) and Unilever (NYSE:
Importantly, while IPS is an ex-U.S. play, it is not strictly
a Europe play, either. Japan is the ETF's third-largest country
weight while Canada and Singapore are among the other non-Europe
country exposures featured in IPS. IPS has gained almost three
percent in the past month.
For more on ETFs, click
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