Europe, not just a vacation opportunity

Heidi discusses the case for eurozone equities, despite the abundance of political uncertainties.

With U.S. markets rallying and considerable political uncertainty across Europe, the only thought many U.S. investors may have regarding Europe is whether the strong dollar means a summer vacation there should be in the works. While I always enjoy planning my next adventure, investors may want to consider Europe as an investment opportunity, not just a vacation spot.

Indeed, after a year of considerable outflows, European equity exchange traded products (ETPs) started seeing inflows in late 2016, gathering over $6.8 billion globally since November (source: BlackRock, as of 1/31/2017). Despite significant political risk ahead, eurozone equities may be worth considering for three key reasons:

Stronger economic growth

Leading indicators of eurozone growth have picked up to multiyear highs as global growth momentum has spread from the U.S. to other regions, including the eurozone, according to BlackRock data. Additional data such as a pickup in loan demand, as signaled in European Central Bank’s Q4 lending survey, suggests this trend could be sustained further.

Earnings momentum

An earnings recession will likely end this quarter and eurozone equities may see a rebound in profitability as a weaker euro and a reflationary environment bring earnings estimates higher, led by banks and commodity-related sectors. In addition, headwinds from recent years including extremely low inflation and weak emerging market growth, seem to be abating. Earnings revisions are accelerating at one of the fastest rates in developed markets and could help drive eurozone equities’ performance (source: Thomson Reuters).

Attractive valuations and light investor positioning

On a price-to-book (P/B) basis, eurozone equities have been trading close to historical lows versus broad developed markets. Nevertheless, although the improving backdrop has led to some inflows in recent weeks, investor participation in the region remains low, especially after post-Brexit outflows, which outpaced those during the European debt crisis (source: BlackRock).

To be sure, Europe’s political uncertainty is rising this year. Brexit negotiations are underway, and a potential victory by Marine Le Pen in the French election could spark further doubt about the future of the European Union. Add to that elections in the Netherlands, Germany and possibly Italy, and this could be a tumultuous year for Europe. What’s more, a potential slowdown in global reflation, flatter yield curves and sharp moves in the euro are additional factors we’ll keep an eye on as we progress through 2017.

That said, the region may fare well in a better global growth environment and find current valuations to be a potentially attractive entry point into eurozone equities. Investors looking to access eurozone equities may want to consider iShares MSCI Eurozone ETF (EZU), iShares Currency Hedged MSCI Eurozone ETF (HEZU), or iShares Core MSCI Europe ETF (IEUR).

Heidi Richardson is Head of Investment Strategy for U.S. iShares and a regular contributor to The Blog.

Maria Eugenia Heyaca, an ETF Investment Strategist, contributed to this blog.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.iShares.com or www.blackrock.com. Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This post contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

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 and in concentrations of single countries.

A fund’s use of derivatives may reduce a fund’s returns and/or increase volatility and subject the fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. A fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited. There can be no assurance that any fund’s hedging transactions will be effective.

The Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.

©2017 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

iS-20243

Join the Conversation

Is it time to buy Europe? Is it time to buy Europe? Join in >