Despite a rash of bailouts and pledges to do more in terms of
integration, investing in Europe is still as uncertain as ever.
Both of the trillion dollar PIIGS economies are now teetering on
the brink with mid-term debt costing both of the countries more
than 6% at this time.
This situation is now causing damage not just in the weak
peripheral nations, but in the core of the euro zone and even in
markets well outside the region as well. In fact, broad global
markets have slumped by nearly 10%-- as represented by the
Vanguard Total World Stock Index ETF
(
VT
) so far in the second quarter, erasing all of the solid gains that
investors saw in the first three months of the year.
With this backdrop, many investors are skittish about investing in
the broad European region at this time as there is just too much
uncertainty for some in the marketplace. However, for those with a
longer time horizon and the stomach for some short term volatility
a closer look at some of the stronger nations could be warranted,
especially in the case of Germany (also see
German ETFs On The Rise
).
Germany is arguably the best positioned nation in the entire EU.
Unemployment is rather low when compared to other European nations
and the weak euro helps the country's many exporters who are
seeking to compete on the global stage.
The country also has the
third highest current account surplus
, trailing only China and Saudi Arabia in this regard while it has
a small budget deficit, coming in below 2%. Meanwhile, the country
has a robust level of foreign reserves (including gold) and a solid
'AAA' rating from all the major agencies (see
Three Great ETFs For Your IRA
).
Thanks to these advantages, investors may want to consider making a
play on the beaten down
German ETF
(
EWG
) at this time. The product tracks the broad German stock market
and gives investors exposure to over 50 companies that are based in
the country.
Furthermore, investors should note that unlike many country
specific ETFs, this one doesn't put too much in financials or
energy. Instead, it offers up a modest 16% to financials, nothing
in energy, and instead is tilted towards cyclical consumer stocks
and basic materials firms instead (read
Euro Small Cap ETFs: The Way to Play Europe?
).
The popular product has been in a slump over the past three months,
losing about 16.5% in the time period, and could be presenting a
solid value to investors at this time, assuming they have a long
time horizon. After all, the P/E on the holdings is a modest 16
while the 12-month yield comes in at a strong 3.5%.
While this exposure may be a great idea for those in it for the
long term, some investors may be worried that Germany may be forced
to foot much of the bill for the euro zone crisis. If Germany does
give in and plunk down cash for the periphery, it could hurt the
overall economy and cause EWG to sink (also see
For Europe ETFs, It Is Hard To Beat Switzerland
).
Given the likelihood of more German spending in order to help boost
peripheral members and their banks, investors may want to consider
pairing a purchase of EWG with a short selection in a slightly
smaller and weaker economy, France, via the
iShares MSCI France Index Fund
(
EWQ
).
The country just across the Rhine from Germany makes for an
excellent short candidate to be paired with EWG for a few reasons.
First, it is a major economy that many investors have looked
towards, at least in the past, in order to help pay for the
mounting bailout bill. However, now the country is looking at
downgrades of its own and some fear that, eventually, the country
will need a bailout of its own as well.
If investors then take these issues and add them together with the
structural problems facing France, it becomes clear why EWQ and
France need to be avoided. Not only does Germany rank far higher
than France in terms of
global competitiveness
, but France appears unwilling to do anything about its growing
budget problems and, if anything, is making things worse (also read
Three European ETFs Beyond The Euro Zone
).
While investors can debate the battle of austerity vs. stimulus all
they want, it seems hard to argue that France's path of lowering
retirement ages and more business taxes or regulations makes any
sense. Yes, France is getting away with it now, but if the bond
vigilantes eventually turn their attention to Paris, some of these
moves will definitely be contributing factors.
Lastly, investors should also note that history is definitely on
the side of EWG over both EWQ and the broad European market. Over
any meaningful time period, EWG has crushed both EWQ and the
iShares MSCI EMU Index Fund
(
EZU
), including doubling the return of both the French and the broad
EMU fund over the past decade.
This is further evident when looking at more recent time frames as
well. In the chart below, look at how EWG has stacked up against
EWQ and EZU over the past three years:
As you can see, EWG has handily outperformed its counterparts in
the time frame. However, it is also important to note that there is
a high level of correlation between the securities both in down and
in up markets.
This is important and it is what makes EWQ such a strong pick for
the short part of this trade. When markets are sliding, all of the
European ETFs are going to be down but Germany has managed to lose
less on rough days than many of its counterparts (also read
Beyond Germany Three European ETFs Tracking Strong
Countries
).
If this holds true, just as it has over the past decade, investors
could obtain a profit even if both EWG and EWQ go down, so long as
the French ETF leads on the downside. Personally, I see no reason
why this won't continue to be true; Germany is in the top class of
Europe and its markets seem poised to outperform France's in the
future just as they have over the past one, three, five, and ten
year periods.
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Author is long EWG
ISHARS-GERMANY (EWG): ETF Research Reports
ISHARS-GERMANY (EWG): ETF Research Reports
ISHARS-GERMANY (EWG): ETF Research Reports
ISHARS-GERMANY (EWG): ETF Research Reports
ISHARS-GERMANY (EWG): ETF Research Reports
ISHARS-FRANCE (EWQ): ETF Research Reports
ISHARS-FRANCE (EWQ): ETF Research Reports
ISHARS-FRANCE (EWQ): ETF Research Reports
ISHARS-FRANCE (EWQ): ETF Research Reports
ISHARS-FRANCE (EWQ): ETF Research Reports
ISHARS-EMU IDX (EZU): ETF Research Reports
ISHARS-EMU IDX (EZU): ETF Research Reports
ISHARS-EMU IDX (EZU): ETF Research Reports
ISHARS-EMU IDX (EZU): ETF Research Reports
ISHARS-EMU IDX (EZU): ETF Research Reports
VANGD-TOT W STK (VT): ETF Research Reports
VANGD-TOT W STK (VT): ETF Research Reports
VANGD-TOT W STK (VT): ETF Research Reports
VANGD-TOT W STK (VT): ETF Research Reports
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