Eurozone Economy Ailing, ETFs In Good Shape

Eurozone’s economy is slowing. In the fourth quarter of 2018, the region’s economic growth was 0.2%, the lowest since the second quarter of 2014 and slightly higher than the previous period's 0.1%.

Notably, Eurozone’s powerhouse Germany has been a laggard. The German economy stagnated in the fourth quarter of 2018 after shrinking 0.2% in the third quarter, which was the first time GDP contacted since 2015.

Also, Italy's economy contracted for the second straight period, shoving the country into recession for the third time in a decade. On the other hand, France's GDP growth rate was unchanged at 0.3%.

Are Weak Economy & Prospects of Soft Brexit Boosting Stocks?

The European Central Bank’s (ECB) latest meeting on Mar 7, 2019 hinted at moderation in economic growth and the need to keep policies accommodative. The ECB delayed an interest rate rise, cut GDP growth outlook for 2019 and 2020, and restarted a stimulus program of cheap loans to breathe life into the struggling economy (read: ECB Surprisingly Dovish: Play Currency-Hedged Euro Zone ETFs).

Continuation of cheap money flows for a few more months has charged up the investing world though volatility will continue to pull the strings. There are chances that Britain will finally settle for a soft Brexit. After failing the Mar 29 deadline, April 12 is the new datewhen a no-deal Brexit could take place.

On the global front, U.S.-China trade tensions are easing and so are its lingering impact on global assets. Probably this is why, iShares Currency Hedged MSCI Eurozone ETF HEZU has added 16.6% this year, even beating the S&P (up 15.4%) this year (as of Apr 5, 2019).

Against this backdrop, below we highlight a few Europe ETFs that could prove to be profitable in the medium term.

iShares MSCI Finland ETF EFNL – Up 5.2%

The underlying MSCI Finland IMI (LON:IMI) 25/50 Index measures the broad-based equity market performance in Finland. Industrials (25.9%), Information Technology (18.7%), Materials (18.1%) and Financials (10.9%) are the top four sectors of the fund.

iShares MSCI Sweden ETF EWD – Up 4.9%

Not all economies are downtrodden as some are displaying upbeat momentum of late. Within the lot, Sweden deserves special mention. The Swedish economy grew 1.2% sequentially in the fourth quarter, recovering from a 0.1% contraction in the previous period and easily beating the market consensus of 0.6%. It was the strongest clip of expansion since the second quarter of 2017.

The fund, which gives exposure to about 32 Swedish stocks, is heavy on Industrials (33.9%) and Financials (26.5%). Information Technology also makes up about 11.3% of the fund.

WisdomTree Germany Hedged Equity Fund DXGE – Up 4.1%

The German economy stagnated in the fourth quarter of 2018 after a 0.2% contraction in the third quarter, which was the first time GDP shrank since 2015.

But analysts at UBS are bullish on German equities, citing cheap relative valuation levels, improvement in trade disputes and a turn in Chinese macro data, as quoted on Bloomberg.

Analysts are of the opinion that the depth of downside in the euro area economy is probably over. “After 17 months of downgrades, German relative earnings momentum has turned.” Though economic growth prospects for the first quarter and early second quarter look grim, an accommodative ECB may bear fruit for this hedged German ETF.

SPDR EURO STOXX Small Cap (NYSE:SMEZ) ETF SMEZ – Up 4.0%

The underlying EURO STOXX Small Index looks to provide a representation of small companies across the Eurozone. France (27.38%), Germany (22.16%) and Italy (12.99%) are the top three geographic allocations of the fund.

iShares Currency Hedged MSCI Germany ETF HEWG – Up 3.9%

The underlying MSCI Germany 100% Hedged to USD Index consists of stocks traded primarily on the Frankfurt Stock Exchange, with the currency risk of securities hedged against the U.S. dollar on a monthly basis.

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