A battered Eurozone seems to be on a slow road to recovery.
Spain finally emerged from its two-year recession in the third
quarter, and this summer marked the first time in three years
that the Eurozone didn't suffer from a financial crisis. Last
week, the European Central Bank lowered interest rates to 0.25%.
These signs of life highlight improving economic signals and
investor confidence in the region -
sentiment echoed by our own Russ K
- and are sparking a surge in select European ETF flows.
Investors flocked to German equities during the height of the
Eurozone crisis in 2011, seeking stability in core countries and
dumping pan-European exposure. Today, we're witnessing the exact
opposite. ETF flows data shows a 52% increase in inflows for
pan-European equities since July. In October alone, the sector
witnessed a record $7.9 billion in inflows, breaking records for
the third consecutive month in a row. UK equities followed,
growing 18% over the past month. Emerging markets and Japan
equities saw 15% and 14% growth, respectively, while the U.S.
lagged them all with an 11% growth rate.
By taking a "reverse defense" strategy, it seems investors are
now pursuing a more diversified approach. The following chart
illustrates this trend during the month of October:
In his latest
Investment Directions report
, Russ Koesterich says
"we continue to advocate a benchmark weight to the Eurozone.
Economic data continues to look promising, adding to signs that
the single-currency bloc's recovery is gaining momentum. Eurozone
company valuations also still looked depressed relative to U.S.
company valuations and the region's corporate earnings are likely
to have troughed. But while cyclical risk is taking a backseat,
policy and political uncertainties are rising. These include
lengthy coalition formation in Germany that is stalling the
region's much-needed banking union reform, Greece and Portugal
bailout reviews, and upcoming asset quality reviews by the ECB."
In terms of broad pan-European exposure, a potential solution is
iShares Europe ETF, or IEV
. For exposure to countries in the European monetary union, or
for UK exposure, potential solutions include the
iShares MSCI EMU ETF, or EZU
, and the
iShares MSCI United Kingdom ETF, or EWU
What's Next for Europe
The ECB's recent announcement that it will lower interest
rates to 0.25% provides even more of a catalyst for Eurozone
pan-European equities and fixed income. However, there are
reasons to be cautious with pan-European equities.
Russ K noted earlier this fall
that while the situation in the region is beginning to show signs
of improvement, risks still remain. As for interest rate
adjustments and the resulting positive impact on fixed income, we
believe that the ECB will hold off on increasing rates until long
after the Fed starts to pull back on its easy money policy.
Dodd Kittsley, CFA, is the Global Head of ETP Research
for BlackRock and a regular contributor to the
. You can find more of his posts
Sources: BlackRock, Bloomberg, Eurostat, Bank of Spain, UK
Office for National Statistics, Reuters
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international investments may involve risk of capital loss from
unfavorable fluctuation in currency values, from differences in
generally accepted accounting principles or from economic or
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