Should You Invest in Europe ETFs Despite Credit Suisse Crisis?
Europe investing has outperformed the United States in the initial phase of 2023, with the SPDR S&P 500 ETF Trust SPY adding 2.4% (as of Mar 10, 2023) and WisdomTree Europe Hedged Equity Fund HEDJ gaining about 15.1%. Though European stock slumped this week due to the global Silicon Valley Bank fallout and Credit Suisse-led banking crisis, the outperformance of Europe equities is likely to continue in the coming days.
According to Helen Jewell, Europe, the Middle East and Africa (EMEA) deputy chief investment officer at BlackRock Fundamental Equities, European fourth-quarter earnings revealed broad-based corporate strength, as quoted on CNBC. The Credit Suisse crisis may also disappear in the medium term.
Below, we highlight a few reasons why Europe ETFs could outperform the United States in the near term.
Credit Suisse Intends to Borrow from SNB
Credit Suisse Group AG said on Thursday that it intended to borrow up to 50 billion Swiss francs ($54 billion) from the Swiss National Bank in what it called "decisive action" to shore up its liquidity, after the former’s biggest backer ruled out monetary support.
The move came after Swiss regulators vowed to offer a liquidity support to Credit Suisse in an unprecedented move by a central bank after the flagship Swiss lender's shares nosedived by as much as 30% on Wednesday on fears of a debt default.
“Regional stock markets [of Europe] have been on a good run year-to-date, but remain at a discount both on a historical basis and versus U.S. peers,” said Helen Jewell, as quoted on CNBC. The P/E ratio of SPY is 21.70X currently while HEDJ has a P/E ratio of 20.03X even after a stellar run in 2023. Another Europe ETF WisdomTree Germany Hedged Equity Fund DXGE has a P/E of 12.57X. The fund DXGE is up 12.7% this year.
Upbeat Corporate Earnings
BlackRock noted that earnings on the pan-European Stoxx 600 Indexwere up by around 8% annually by the end of February, even without the energy sector. “Europe is the only region globally where 2024 earnings revisions are just back in positive territory,” Jewell said, per the CNBC article.
Around 60% of European companies beat fourth-quarter sales expectations, while only around 50% beat on profits, according to MSCI data compiled at the end of February, as quoted on CNBC. As far as the energy sector is concerned, a supply crunch, OPEC output cut, and reduced Russian supplies would keep European energy behemoths in a sweet spot.
Still-Lower Rates in Europe Than United States
Though both European Central Bank (ECB) and the Federal Reserve (Fed) have hiked rates in recent times to control inflation, ECB’s rates are still way lower than that of the Fed. A recent Reuters poll indicated that the ECB deposit rate will peak at 3.75% or higher, while rates in the United States may peak at 6%, as expected by analysts. However, the latest global bank crisis may keep the Fed and the ECB from hiking rates that fast.
Against this backdrop, below, we highlight a few winning Europe ETFs of this year.
ETFs in Focus
iShares MSCI Ireland ETF EIRL – Up 16.9%
WisdomTree Europe Hedged Equity Fund HEDJ – Up 13.5%
WisdomTree Germany Hedged Equity Fund DXGE – Up 12.7%
iShares MSCI Spain ETF EWP – Up 12.2%
Franklin FTSE Italy ETF FLIY – Up 11.8%
Franklin FTSE Germany ETF FLGR – Up 11.4%
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SPDR S&P 500 ETF (SPY): ETF Research Reports
WisdomTree Europe Hedged Equity ETF (HEDJ): ETF Research Reports
iShares MSCI Spain ETF (EWP): ETF Research Reports
WisdomTree Germany Hedged Equity ETF (DXGE): ETF Research Reports
iShares MSCI Ireland ETF (EIRL): ETF Research Reports
Franklin FTSE Germany ETF (FLGR): ETF Research Reports
Franklin FTSE Italy ETF (FLIY): ETF Research Reports
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