As we enter into the fifth consecutive year of a bull market,
Russ Koesterich encourages investors
maintain their emphasis on stocks
. But with volatility in emerging markets and a sense that U.S.
equities are no longer cheap, investors are increasingly seeking
exposure elsewhere. Enter: Europe.
We first hinted at Europe's comeback on the Blog last fall,
highlighting how pan-European equities gained momentum as a
result of improving investor confidence in the battered Eurozone.
U.S. flows into pan-European equity ETFs totaled $5.3 billion
YTD*, while single country funds took in $1.4 billion. The United
Kingdom and Spain led the charge with $0.7 billion and $0.4
billion, respectively. As the region gains momentum and stages an
economic recovery, there are several reasons to revisit exposure
Eurozone** stock valuations are attractive relative to
As previously mentioned, we think Eurozone equities are
inexpensive right now. If you look at the
price to book ratio
of the Eurozone versus the U.S. compared to the long term
average, comparing the MSCI Europe and S&P 500 from 1975
through 2013, you can see there is much value to be had
Eurozone vs. U.S. Stocks
Source: Bloomberg as of 12/31/2013
Economies within the Eurozone are improving.
We're seeing significant developments in the Eurozone's economy.
It grew by 0.3% in the final three months of 2013, up from 0.1%
growth in the previous quarter. Additionally,
the CESIfo Business Climate
Index, which measures the economic strength of Germany, reports
that manufacturing improved for the fourth consecutive month in
Monetary policy promotes growth.
As the Federal Reserve scales back its easy money program here in
the U.S., the European Central Bank (ECB) is holding its key
interest rate steady at 0.25% as the recovery strengthens. The
market generally expects the ECB to keep its rates low for
longer, as deflation remains a concern in the area. The countries
hit hardest by the debt crisis still have much progress to make
before returning to normal, and a low-for-longer rate stance by
the ECB makes European equities especially attractive at this
Investors looking for ways to access European equities have a
couple of ways to do so:
Those seeking broad, cross-continent exposure
may want to look at the iShares Europe ETF (
), with allocation to 17 European countries.
We maintain our overweight to the Eurozone
For access to the Eurozone without the United
you may want to try the iShares MSCI EMU ETF (
For investors seeking more targeted or customized
exposure to Europe,
individual country funds may be an attractive solution. iShares
currently offers 14 of the 17 countries in the iShares Europe
ETF as a single country ETF, such as:
- The iShares MSCI Germany ETF (
). Russ K is currently neutral to Germany.
- The iShares MSCI United Kingdom ETF (
). Russ K is currently neutral to the United Kingdom.
For the month of March, we have so far seen some setbacks for
European equity ETF flows. We believe this could be related to
geopolitical tensions between Russia and Ukraine. We continue to
keep a close eye on the situation. For more on that, check out
Russ K's Blog post,
What Rising Turmoil in Ukraine Would Mean for Stocks
*YTD as of 02/28/2014
**Eurozone is defined as countries with the euro as its
International investing involves risks, including risks
related to foreign currency, limited liquidity, less government
regulation and the possibility of substantial volatility due to
adverse political, economic or other developments. These risks
often are heightened for investments in emerging/ developing
markets, in concentrations of single countries or smaller