Investing in Europe
The current decline of the Euro, due in large part to the politicized measures of the European Central Bank, may appear to be a good entry point for investing in Europe. This is especially true given the uncertain outlook for Asia as well as the high cost of U.S. and of the world’s largest equities.
On the other hand, many experts expect inflation in the Eurozone to rise, which will reduce the purchasing power of Eurozone currency holders. Therefore, it will be important to avoid holding Euros in cash, and if inflation does not rise, investors could consider investing in equities in the Eurozone and in the UK (where the pound and the stock market are still at a reasonable level).
However, one should always be careful with partially active management and never drift massively from a balanced allocation with overly concentrated bets. However, for those who wish to avoid the high prices of the largest international stocks, here is a small, non-exhaustive tour of the possible options in Europe that will allow investors to continue their reflection.
The dangers of the flagship index of Europe’s largest caps: STOXX 50
As mentioned, the heavy weighting of US and tech stocks makes investing in a global index more expensive. A more granular analysis is therefore required. A well-known low-cost ETF is the iShares Core EURO STOXX 50. Riding the wave resulting from the ECB opening the floodgates in 2020, this ETF has seen its price rise by over 50% since May 2020. Representing the top 50 stocks in Europe, its constituents are included in global indices and are very expensive, with a P/E of over 29 in November 2021! Good for you if you had invested when this index was apparently undervalued (we know some happy ones), but it is now too late.
In view of these high prices, we have two options: Choose a higher level of granularity with the possibility to look for undervalued pockets or look for a broader index at the European level that is not as overvalued.
Searching for pockets of undervalued stocks in Europe
Some industry specific ETFs (iShares MSCI Europe Financials ETF with fees of 0.48% or the iShares Oil & Gas Exploration & Production UCITS ETF with costs of 0.55%) or country specific ETFs (iShares Austria with TER of 0.51%) are affordable at their current level but have too high management fees and/or too low volume.
So here is a quick overview, if you consider the largest countries in Europe:
ETFs investing in Germany
It is possible to invest in a few countries with good conditions. For Germany, avoid iShares MSCI Germany Small-Cap ETF (TER of 0.59%) and favor Vanguard’s VGER which includes large, mid and small cap stocks of companies located in Germany (15% withholding tax) with a TER of 0.10% and a PE of 14.2 (as of November 2021).
ETFs investing in France
The French market is currently very expensive with its stocks strongly represented in the STOXX 50 index (nearly 30% of the index), such as LVMH, TOTAL, LOREAL, SANOFI or AIRBUS. This makes the iShares MSCI France UCITS ETF options with a TER of 0.25% and especially a PER of over 29 very unattractive!
ETFs investing in Holland, Spain and Italy
In Holland, Spain and Italy, there are few specific options and the few existing ones (the iShares MSCI Netherlands, ISHARES MSCI Spain and iShares MSCI Italy ETFs for example) all have limited volumes and too high fees with a TER of 0.51% each.
ETFs investing in Switzerland
The Swiss franc is partially overvalued and Swiss blue chips are fairly expensive, but for those who want to go deeper into the subject, they can refer to the dedicated article on Swiss investments.
ETFs investing in the United Kingdom
If you are looking for opportunities in Europe and outside the EURO zone, the UK, mired in the EU exit, has lower prices and a depreciated currency which makes it attractive (no Withholding tax either thanks to the Swiss/UK DTA). Two main options based on two indices come into play. First, the Vanguard FTSE 100 UCITS ETF (VUKE), which covers the 100 largest companies in the UK, with a TER of 0.09%, assets of £3.6 billion and a P/E of 13.9. Next to this, the Vanguard FTSE 250 UCITS EF (VMID) includes the following 250 companies not covered by VUKE with total assets of £2.7 Billion, a TER of 0.1% and a very attractive P/E of less than 10 in November 2001! The disadvantage is that it includes mostly small and medium sized companies and none of the major companies (top 100). If you are not comfortable with the higher risks of the smaller caps, then go for VUKE instead. Beyond the less positive outlook in the U.K., it appears that smaller companies outside the core indices are not suffering from the same asset price inflation. Thus, not all stock prices appear to be overly valued unless you have significant exposure to a major index.
Broader index at the European level not highly overvalued
Investing in a granular way allows you to take advantage of undervalued assets and currencies, but it takes time and carries the risks of active management.
A more diverse ETF becomes an option for beginners and those who want to spend less time managing their assets. The Vanguard FTSE Europe ETF (VGK) measures the performance of stocks issued by companies located in the major markets of Europe (FTSE Developed Europe All Cap Index), including Switzerland (14%) and the UK (24%). It costs only 0.08%, has a large volume of over USD 26 billions and an acceptable P/E of 17 in November 2021. Larger and more affordable than the EURO STOXX 50, it is therefore a prime candidate.
Putting it into practice
In summary, Germany and England seem to be individual options to keep in mind while a broad index like the Vanguard FTSE Europe ETF (VGK) is preferable to the STOXX 50 UCITS ETF. If you have already invested in the STOXX 50 UCITS ETF, a more diversified index such as the VGK as a single vehicle or as a base with an overweight to affordable ETFs investing in the UK and Germany for example is preferable. These two approaches, one more complex with timing and active management components for more advanced investors, the other passive for beginners appear to be solid approaches. But if your method seems to be more appropriate for european investments, please contact us and we will gladly adjust the buffet menu presented above!