ETFs Reflect 3 Key European Markets in Turmoil
The JPMorgan BetaBuilders Europe ETF (BBEU) until this week had pulled in more assets than any other exchange-traded fund year to date, with inflows of $5.7 billion.
It wasn’t alone. The Vanguard FTSE Europe ETF (VGK) gained $1.1 billion during the same time period. Many U.S. investors began looking abroad for diversification given the U.S. market’s dismal performance last year.
However, the three countries with the largest weightings in both BBEU and VGK—the United Kingdom, France and Switzerland—have seen some tumultuous developments in the last few weeks that call into question their attractiveness from an investment perspective. All together, those three countries represent well over half of the entire portfolio weight of both funds.
“They are a large part of Europe, and whatever happens in these three countries would have a major role [in] how Europe performs as a whole,” said Saurabh Katiyar, EMEA head of index solutions research at MSCI.
BBEU and VGK are up 6.3% and 6.4%, respectively, year to date. Meanwhile, the iShares MSCI France ETF (EWQ) is up 10.01%, while the iShares MSCI Switzerland ETF (EWL) and the iShares MSCI United Kingdom ETF (EWU) are up 3.4% and 1.9%, respectively.
All but one of those funds has outperformed the Vanguard Total Stock Market ETF (VTI), which is up just 2.8% during the same period.
Strong Performance Amid Turmoil
France is facing a great deal of social unrest, including strikes, protests and some outbreaks of violence, in the wake of President Emmanuel Macron’s administration’s proposal to raise the country’s retirement age by two years to 64 for most workers and increase pension payments from workers. The measure, which was first brought up in January, was forced through in mid-March without a parliamentary vote.
Despite the fact that the changes are not popular among French citizens or its unions, the country’s stock market has pulled definitively ahead of the broad European market by several percentage points this year, helping to boost the performance of the region overall. That said, EWQ’s flows are flat this year.
Given that France’s left wing had been demanding the government raise taxes on corporations rather than increase the retirement age, the fact that Macron’s administration has rammed the policy through can only bode well for French companies as long as they are not derailed by the multitude of ongoing union strikes throughout the country.
A Country Known for its Banking
Switzerland has long been famous for its banks, mountains and chocolate, but this month, one of its largest financial institutions, Credit Suisse, collapsed under the weight of $35 billion in withdrawals by clients. Another major Swiss financial institution, UBS, agreed to acquire it in a $3 billion deal that was designed by the Swiss government to shore up confidence in the troubled banking sector.
The Credit Suisse collapse and subsequent deal with UBS came on the heels of the second and third largest bank collapses in U.S. history the prior week. An article published by Reuters notes that the Swiss franc, long considered a safe haven, saw money managers bail out of it at the fastest rate in two years.
“The way the central bank quickly moved to contain the damage and ensure that there was a systematic resolution was a big positive, in my view,” Katiyar said, labeling what happened with Credit Suisse an idiosyncratic risk rather than a systemic one.
UK Hampered by Inflation
Inflation is a global problem, Katiyar notes. However, the United Kingdom has been hit harder than even the U.S. by the trend. Earlier this week, CNN reported that consumer prices in the U.K. were up more than 10% year over year, the worst level of inflation in more than 45 years. And just a day or two later, The Guardian reported that the Bank of England had hiked the country’s interest rate by 25 basis points in the country’s 11th rate hike since December 2021.
The country was already rocked last September when Liz Truss’ doomed government rolled out a “mini budget” that featured major unfunded tax cuts that led to a plunge in gilt prices.
The U.K. has also struggled post Brexit, which is now regretted by more than half of the population, CNBC recently reported in an article that also noted the country is expected to be the worst performer in the G-20 during the next few years. With all of that, it’s no wonder the U.K. stock market is trailing the broader European market.
Europe vs. US Valuations
Despite the events rattling (and in one case boosting) these three key markets, Katiyar says Europe has many “interesting characteristics” at the moment, including among them that it’s export-oriented, with many of those exports going to emerging markets, which he describes as resilient, with high growth.
That resilience translates into a bit of a backstop for European countries’ revenue growth, though he says stress could come from the fact that European companies tend to have higher leverage than U.S. companies. He also notes that European companies currently have lower profitability relative to U.S. stock.
“What we have seen is that the valuation gap which exists between Europe and the U.S. is still there. The U.S. continues to be very expensive, while Europe relatively has much cheaper valuations, even when we account for the historical valuation gap between them,” Katiyar added.
He notes that MSCI’s U.K. and France indexes are trading at lower valuations compared to the MSCI Switzerland Index, though Switzerland has higher profitability levels. All three have similar levels of leverage, he said.
Contact Heather Bell at heather.bell@etf.com
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