Barclays Says Buy Europe Now

July 20, 2010

Forget about the return of volatility since April, now’s the time to jump into European equities, and a slew of ETFs are there to help you do it in ways broad and narrow.

Even though concerns about a double-dip recession may have taken center stage in the global economy since problems in Greece soured investor sentiment in the spring, now’s actually the time to do some bottom-fishing in European equities, where valuations are cheap, Barclays Capital says.

The investment banking unit of Barclays Bank PLC said that while European shares remain under selling pressure, the mood has shifted from skeptical to euphoric in anticipation of a strong second-quarter earnings season and on relief connected to leaked details of stress tests on European banks.

A variety of ETFs canvas the space, from a broad spectrum of ETF sponsors, including iShares and Vanguard. The biggest of the funds, the Vanguard European ETF (NYSEArca: VGK), has fallen more than 10 percent since mid-April, when concerns about debt levels and the strength of the recovery grew.

“We expect the rally to resume as the earnings season unfolds and corporate profit details provide further insight into the sustainability of the global growth story,” Barclays Capital analyst Sreekala Kochugovindan wrote in a research note. “We continue to favour European equities where valuations remain attractive.”

European shares were down for their fifth-straight day on Tuesday, with the FTSEurofirst 300 Index, which includes companies across the continent, off by more than 10 percent since mid-April.

Broad-Based ETF Choices

Investors in U.S.-based ETFs focused on Europe have been dealt two blows since investor sentiment faltered in the spring—falling equities and a tumbling euro. That means returns could be held back should the euro continue to falter in currency markets. For example, the CurrencyShares Euro Trust (NYSEArca: FXE), an ETF targeting the euro-dollar cross, has fallen 4 percent in the past three months.

The iShares MSCI EMU Index Fund (NYSEArca: EZU), which focuses on companies in the eurozone, has lost more than 13.5 percent in the past three months, compared with an 8.4 percent decline for the iShares Euro Stoxx 50 ETF (LSE: EUE), a Europe-based fund that has a similar focus to EZU but doesn’t reflect the euro’s decline against the dollar.

The 10 percent declines on Vanguard’s VGK, mentioned above, are less than on EZU because it casts its net beyond European countries that use the euro, including the U.K., Denmark, Sweden, Norway and Switzerland.

Single-Country ETFs

Steering clear of countries at the center of Europe’s fiscal crisis is entirely possible with ETFs, which have come to be associated with laser-beam precision in their investment exposure.

As New Jersey-based financial adviser Matt McCall wrote in a recent column on, Scandinavia is as promising a destination for investors as it is for vacationers.

Two ETFs come to mind. First, there’s the broad-based Global X FTSE Nordic 30 ETF (NYSEArca: GXF), which captures all four countries—Sweden, Norway, Finland and Denmark. Sweden makes up about 40 percent of GXF, and for those who want to take the full plunge, there’s the iShares MSCI Sweden ETF (NYSEArca: EWD). McCall said he likes EWD because it’s more liquid than GXF, but the diversification of GXF makes it the better long-term investment. The fact that’s dropped just 6 percent in the past three months doesn’t hurt either. Remember, part of that is that Sweden’s not part of the eurozone.

Countries such as Germany that use the euro, but are somehow apart from the crisis that is most acute in southern Europe, also have ETFs designed around them.

As Matt Hougan observed in an interview on CNBC earlier this year, countries like Germany that have a relatively healthy fiscal outlook as well as a reputed and well-established manufacturing sector, may actually do better because a weaker euro is likely to pump up exports.

The iShares MSCI Germany Index Fund (NYSEArca: EWG) has fallen 9 percent in the past three months, a figure that includes currency-related losses.

“Although we cannot expect the strong profit numbers seen at the end of last year (our research suggests) double-digit growth is likely into year end. Thus recent investor optimism over US and European earnings reports are unlikely to be disappointed,” the Barclays report said.

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