On Monday, Moody's Investors Service stripped France, the
eurozone's second-largest economy behind Germany, of the
prestigious AAA credit rating. Citing a murky fiscal condition
and contracting, Moody's lowered France's credit rating one notch
to Aa1. The ratings agency holds a negative outlook on
In the near-term, the loss of the AAA rating might be enough
to chase some investors out of French equities, but it is worth
noting these stocks have been decent performers this year. Amid
significant domestic and eurozone headwinds, the iShares MSCI
France Index Fund (NYSE:
) has jumped almost 12.2 percent year-to-date.
Some analysts are now taking a more bullish view of French
stocks. For example, iShares Global Chief Investment Strategist
Russ Koesterich upgraded France to Overweight from Neutral,
citing attractive valuations.
"French equities are now looking attractively valued. At a
price-to-book multiple of 1.14, France is 14% below its
%-year average, and is offering a 31% discount to the MSCI World
Index, and a 15 percent discount to Germany,"
Koesterich wrote in a blog post
EWQ, the lone France-specific ETF, has a price-to-earnings
ratio of 16.1 and a price-to-book ratio of 1.7. That compares
favorably with the iShares MSCI Germany Index Fund, which has a
P/E ratio of almost 18.6 and a price-to-book ratio of nearly 2.1,
according to iShares data
Pharmaceuticals giant Sanofi (NYSE:
) and Total (NYSE:
), Europe's third-largest oil company, combine for 21.5 percent
of EWQ's weight. One point in favor of EWQ is sector diversity,
something that is not often found with many country-specific
"The broad French market is well diversified with no single
sector accounting for more than 16 percent of the MSCI France
Index, and the deep discount in non-financial sectors compared to
peers in Germany and the rest of developed Europe is in our view
hard to justify," according to Koesterich.
Financial services name represent about 15.6 percent of EWQ's
weight while industrials account for 14.9 percent. Consumer
discretionary names receive an allocation of 13.2 percent while
health care and energy names each represent more than 12 percent
of the fund's total weight.
Despite the sector diversity, with financials being the
largest sector weight, EWQ can at times be beholden to
macroeconomic concerns. The ETF was hit last month
when Standard & Poor's downgraded some French
. The affected institutions included BNP Paribas, Credit Agricole
S.A. and Societe Generale. That trio combines for 8.25 percent of
"Across Europe, the state of the financial sector is a
concern," wrote Koesterich. "Indeed, I would balance the France
overweight with European financial sector underweight in order to
help mitigate specific risk linked to financial sectors."
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