Whilst reform in Europe is politically difficult, and investors are likely to be periodically frustrated along the way, there are economic solutions to the continent’s challenges, according to the latest Market Perspectives research note from the iShares Investment Strategy team.
The Nordic region, which includes countries such as Norway (pictured), have managed to dodge the worst effects of the European recession, says iShares.
The Investment Strategy team at iShares also acknowledged the attraction of European equities and highlighted opportunities in the more stable northern and Nordic regions of Europe, which appear undervalued relative to fundamentals. [See also European equity ETFs offer long-term value].
Commenting on the research, Russ Koesterich, iShares’ Global Chief Investment Strategist, said: “The good news is that the European Union is solvent, at least in aggregate. By lowering bond yields the European Central Bank (ECB) has bought politicians time, but they must use this respite to address the structural flaws that hamper growth and leave the banking system at risk”.
The iShares team sees three main requirements if Europe’s political class is to move fast enough to satisfy financial markets and address economic realities.
First, Europe needs closer fiscal union, including a mechanism that at least partially pools sovereign obligations. Second, banks need recapitalising and financial regulation needs synchronising, including the introduction of a euro-wide deposit insurance scheme. And third, Europe needs to stimulate economic growth by tackling structural impediments such as rigid labour markets and grossly inefficient public sectors.
On the investment case for Europe, Stephen Cohen, Head of Investment Strategies EMEA at iShares, commented: “For investors who believe that Europe has avoided a crisis, the attraction of European equities is not hard to understand. They are trading at a big discount, both to their history and to other countries.”
Cohen added: “We prefer equities in the more stable north, particularly German, Dutch and Norwegian stocks which appear undervalued relative to fundamentals. We remain underweight Spain and Italy, believing they are cheap for a reason. Taking a more aggressive position in Southern Europe would depend on evidence of either faster growth or a lower risk premium. Both rest in the hands of the politicians.”
There are a number of ETFs available to investors looking for exposure to the various Northern European countries highlighted by iShares, as well as to the region more generally. The following are all available to UK-based investors.
Germany
Amundi ETF MSCI Germany (CG1)
Tracks the MSCI Germany Index, capturing the performance of approximately 85% of the German equity market by market capitalisation. Index comprises approximately 50 holdings. Listed on the London Stock Exchange, NYSE Euronest Paris, Borsa Italiana and Deutsche Börse. Synthetically replicated. Total expense ratio (TER) 0.25%.
db X-trackers DAX ETF (XDAX)
Tracks the DAX Index, reflecting the blue-chip segment of the German equity market. Index comprises the 30 largest and most actively traded companies on the Frankfurt Stock Exchange. Listed on the Deutsche Börse, Mercado Continuo Espana, Stockholm Stock Exchange and SIX Swiss Exchange. (Despite not having a London listing the fund is registered in the UK and has HMRC Reporting Status). Synthetically replicated. TER 0.15%.
Netherlands
iShares AEX ETF (IAEX)
Tracks the AEX-Index, the most widely followed gauge of the Dutch stock market, offering exposure to the 25 most traded stocks listed on NYSE Euronext Amsterdam. Listed on the London Stock Exchange. Physically replicated. TER 0.30%.
SPDR AEX Index ETF (AEXT)
Tracks the AEX-Index (see above). Listed on the NYSE Euronext. (Despite not having a London listing the fund is registered in the UK and has HMRC Reporting Status). Physically replicated. TER 0.30%.
Amundi ETF MSCI Netherlands (CH1)
Tracks the MSCI Netherlands Index, capturing the performance of approximately 85% of the Dutch equity market by market capitalisation Index comprises about 22 holdings. Listed on the London Stock Exchange and the NYSE Euronext Paris. Synthetically replicated. TER 0.25%.
Nordic region
Amundi ETF MSCI Nordic (CN1)
Tracks the MSCI Nordic Countries Index, capturing the performance of approximately 85% of the Scandinavian equity market by market capitalisation. Index comprises around 80 holdings across Denmark, Finland, Norway and Sweden. Listed on the London Stock Exchange, NYSE Euronext Paris, Borsa Italiana, Deutsche Börse and SIX Swiss Exchange. Synthetically replicated. TER 0.25%.
The following are listed on foreign exchanges and are not known to have HMRC UK Reporting Status. Whilst this does not preclude UK-based investors from investing, the tax treatment is typically less favourable.
Global X FTSE Norway 30 ETF (NORW)
Tracks the FTSE Norway 30 Index, representing the performance of the 30 largest and most liquid Norwegian securities listed on the Norwegian Oslo Bors Stock Exchange. Physically replicated. Listed on the NYSE Arca. Total expenses 0.50%.
Global X FTSE Nordic Region ETF (GXF)
Tracks the FTSE Nordic 30, representing the performance of the 30 largest and most liquid companies traded on the Danish, Finnish, Norwegian and Swedish Stock Exchanges. Physically replicated. Listed on the NYSE Arca. Total expenses 0.50%.
iShares MSCI Norway Capped Investable Market Index ETF (ENOR)
Tracks the MSCI Norway IMI 25/50 Index, reflecting the performance of the Norwegian stock market. Index comprises approximately 57 holdings. Listed on the BATS Exchange. Physically replicated. Total expenses 0.53%.
Other providers with relevant ETFs include XACT, which has a range of funds tracking Swedish and Norwegian equities, and Swedbank Robur, which offers an ETF tracking Swedish equities.