Europe ETFs Grab Value Spotlight

September 13, 2019

European equity ETFs have been largely unpopular this year, bleeding nearly $6 billion in combined assets amid an ongoing global economic slowdown.

That tide, however, could be about to turn due to two key factors: quantitative easing and bargain hunting.

The European Central Bank cut its deposit rate further yesterday into negative territory by 10 basis points, to negative 0.50%, and it announced the restart of its asset-buying program in November. The quantitative easing measures are expected to boost the eurozone economy. Expectations of this move had European stocks riding higher for over a week.

Companies like BlackRock have recently talked about their changing stance on European equities, saying they were turning “constructive” on the segment, and upgrading the region from underweight to neutral.

‘Tail Wind For Equities’

“The European Central Bank’s fresh monetary stimulus could provide a tail wind for equities,” BlackRock’s Chris Dhanraj said in a recent blog. “We believe the negative sentiment toward the region may be overdone when comparing Europe’s risk to emerging markets, and its valuations to U.S. equities.”

Risks still abound in Europe, BlackRock says. The region has been plagued with weak inflation and economic growth year on year of just over 1% as of the second quarter. But there’s value in the region. According to BlackRock, valuations in eurozone equities relative to the U.S. are the lowest they’ve been in nearly a decade, as the chart below shows:

 

Source: BlackRock

 

Performance Picks Up, Demand Lags

The question now is whether this combination of European quantitative easing coupled with hopes that the U.S.-China trade dispute will soon find a resolution and bargain hunting from oversold levels could push investors back into Europe-linked ETFs. Recently, the impact on fund performance is evident.

Consider the iShares MSCI Europe Financials ETF (EUFN), the largest ETF to invest exclusively in the European financials sector. In September alone, the fund has rallied about 8%, bringing year-to-date gains to 8.7%:

 

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