By
Gary Gordon
:
Value-oriented thinkers have labored to persuade investors to
invest in Europe for nearly three years. Specifically, they've
pushed forward the idea that miraculously low price-to-book ratios
offer compelling bargains in European
ETFs
, in spite of the ongoing sovereign debt crisis and negligible
economic growth.
However, deep discount investing during financial crises is a
recipe for failure. For example, by 2007, Bill Miller built Legg
Mason Value into the largest mutual fund on the planet.
Unfortunately, the guru chose to pack his luggage with banks and
insurers. Mr. Miller stubbornly stood by his "call" throughout the
collapse in 2008, pointing to exceptionally attractive valuations
like low price-to-book ratios. In the end, shareholders watched in
horror as -75% returns had evaporated their asset. And Mr. Bill? He
retired in reasonable comfort a year later.
Granted, there are differences between the credit crunch of 2008
and Europe's sovereign debt mess. Yet there are more similarities
than many care to admit. We're still talking about major banks and
insurers holding toxic debts (e.g., Greek 2-year notes, Spanish
bonds, etc.) that threaten the global financial system. Saving the
European banks will require more and more "bailout euros," which is
likely to erode the value of the currency in the near term.
For this reason, I haven't had any direct exposure to Europe for
several years. There's not enough diversification reasoning in the
financial planning pot to persuade me that unhedged European ETFs
are sensible risk-reward investments at this time.
In contrast, Russ Koesterich, iShares Global Chief Investment
Strategist, is the latest individual to suggest adding some
European flare. He is recommending iShares MSCI France (
EWQ
). The reasons he cites include a price-to-book multiple of 1.14, a
31% discount to the MSCI World Index and a 15% discount to
Germany.
If we were able to rely on fundamentals alone, I might share Mr
Koesterich's assessment. Yet France is a major component of a
deepening recession in the region and the political leadership
abhors capitalism. Moreover, a euro that depreciates against the
dollar hurts EWQ's chances, and I see little evidence that the euro
will strengthen over the next six months.
Then there is the technical picture. When European Central Bank
chief Mario Draghi proclaimed in July that he would do whatever it
takes to save the euro, European assets like EWQ hit a series
(July, August, September) of "higher lows." That is a bullish
pattern for stocks. In contrast, shortly after Draghi announced the
specifics of the ECB's plans in September, EWQ has been hitting a
series (September, October, November) of "lower highs." That is a
bearish pattern for stocks.
(click images to enlarge)
While I continue to
hitch my cart to Asia Pacific ETFs
for "foreign exposure," I recognize that some ETF investors still
want access to great European companies like Unilever,
Sanofi-Aventis and Moet Hennessy Louis Vitton. If you feel the
urge, then I advise using a currency hedged vehicle like WisdomTree
European Hedged Equity (
HEDJ
).
This exchange-traded fund is hedged such that you can expect
higher returns than a similar non-currency hedged investment like
EWQ… assuming the value of the dollar is increasing relative to
that of the euro. And right now… this is precisely what is
happening. HEDJ is roughly 1% off its 52-week highs, whereas EWQ is
closer to 5% off its peak.
Disclosure:
Gary Gordon, MS, CFP is the president of Pacific Park Financial,
Inc., a Registered Investment Adviser with the SEC. Gary Gordon,
Pacific Park Financial, Inc, and/or its clients may hold positions
in the ETFs, mutual funds, and/or any investment asset mentioned
above. The commentary does not constitute individualized investment
advice. The opinions offered herein are not personalized
recommendations to buy, sell or hold securities. At times, issuers
of exchange-traded products compensate Pacific Park Financial, Inc.
or its subsidiaries for advertising at the ETF Expert web site. ETF
Expert content is created independently of any advertising
relationships.
See also
The End Of Growth? Defensive Sectors Looking
Attractive Again
on seekingalpha.com