In the past six months, European
have been soaring higher. Worries over a broad debt crisis faded
from memory, while a rosier outlook for the global economy
allowed many to buy up European ETFs in droves.
This was especially true in the troubled PIIGS markets like
Spain and Italy, which were at the heart of the crisis. After
all, if either of these trillion dollar economies face real
trouble, it could spell doom for the euro zone experiment,
casting a recession cloud over the entire continent.
This didn't come to pass in the latter half of 2012 though, as
representing Italy, and
representing Spain, added about 20% in the second half of the
year. This signifies a huge reversal from the first half of 2012
in which both were deep in the red, suggesting that momentum had
shifted-and quite strongly-to being positive over the European
outlook heading into 2013 (read
The Key to International ETF Investing
While this trend continued into the first part of 2013, some
are worried that it might have topped out in the near term,
largely thanks to a new crop of
issues plaguing both
of these countries. Except, this time around, debt isn't the crux
of the issue, politics are.
First in Spain, current Prime Minister Mariano Rajoy is facing
a surge of anger from the general population over bribery
accusations, with some
calling for his resignation
. While it remains to be seen how deep or extensive this issue
will become, a political crisis over cash in a country dealing
with austerity measures and record unemployment cannot be good
for national stability (read
Is the Ireland ETF No Longer a PIIGS Member?
Meanwhile in Italy, the country is approaching an election
later this month with some predicting a surge for former Prime
Minister Silvio Berlusconi and his party at the polls. Somewhat
hilariously, Berlusconi promised to get rid of a new property
tax-saving owners about $5.4 billion-which was only (arguably)
necessary due to his mismanagement of the economy last time he
was in charge.
While Berlusconi has political issues of his own, thanks to a
variety of scandals in his own right, it remains to be seen if he
can recapture the Prime Minister position. Either way, it could
be a volatile stretch for Italian securities as electoral
uncertainty casts a shadow over the troubled market (see
ETFs for 3 of the Cheapest Markets in the
Thanks to these issues, equities in both countries plunged
earlier in the week while bond yields surged. In fact, sell-offs
in both EWI and EWP were so extensive that they erased all of the
gains that investors saw to start 2013 in the products, leaving
both in the red.
While the debt part of the European crisis may have taken a
breather, the region isn't out of the woods yet. Political crises
are now the main worry for the euro zone and they look to drive
EWP and EWI in the short-term.
This can create some significant volatility, as we have seen
to start February, with both funds plunging by 4% (or more) one
day, only to add a few percentage points back the next session.
And with both crises looking to be relatively longer-term
stories, this could be the trend for both the Spain and Italy
ETFs for the intermediate future (read
Three European ETFs with Incredible 2012
Currently, we have a Zacks ETF Rank of 4 or 'Sell' assigned to
both funds, meaning that we believe underperformance is in the
cards for both nations this year. If the recent issues have been
any guide, this could certainly be the case for both funds in
2013, suggesting that investors may want to look elsewhere in
Europe for their international exposure.
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ISHARS-ITALY (EWI): ETF Research Reports
ISHARS-SPAIN (EWP): ETF Research Reports
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