Is the Eurozone Robust Enough to Qualify as a Buy?


There was never a genius without a tincture of madness.” — Aristotle


The Eurozone has mainly been off the virtual front page of the financial section for the majority of the year to date. And for investors who may be wondering what all the quiet is about, wonder no more. For the moment at least, the single-currency union has been playing nice and may offer investors an opportunity to jump back into the water, or at least stick in a toe.

It wasn’t so long ago that the region seemed on the verge of implosion, or at least a radical realignment. Greece spent the better part of 2011 and a good deal of 2012 begging for money to cover its debt, and it was pretty much a coin toss among analysts as to whether the country could remain in the Eurozone. Spain and Italy, with substantially larger economies, also exhibited serious banking liquidity issues. Even the rock of the region, Germany, began to exhibit symptoms of collateral damage, and both its politicians and its populace became vocal in expressing the sentiment that they no longer wanted to support their southern neighbors.

Italian, Greek and Spanish bond yields soared, as investors demanded high returns in exchange for the very real risk that the region’s slumping credit warranted.

So when the president of the European Central Bank Mario Draghi proclaimed in July of 2012 that the ECB would do “whatever it takes” to keep the monetary union intact, investors seemed wary, though the statement somewhat amazingly stemmed the flow of blood in both the equity and bond markets.

That was then, this is now; and while the region seems to have managed to pull itself out of an extended recession as of the end of this summer, it would be difficult to find an economist who would call the region’s economy robust.

The tool that was being offered to back up Draghi’s “whatever it takes” promise was that of a virtually unlimited bond-buying plan by the ECB, and it seems as if the invocation alone served the purpose of comforting investors. To date, however, the plan has not been utilized for a number of reasons, including a certain punitive cost to any country that chooses to use it.

Still, it does remain available for the purpose, and that availability alone remains enough of a prop to keep the wolves from the gate.

The result has been that bond yields have dropped to levels that the issuing countries may actually be able to pay without breaking their already fragile banks. As well, the harsh austerity measures imposed on the PIIGS (Portugal, Ireland, Italy, Greece and Spain) has appeared to accomplish what it was intended to do, which was to help stifle out-of-control budgets of the majority of the southern Eurozone governments.

So for the moment, things across the pond are relatively calm. However, under the hood, very little real change has been undertaken in the region, even though the big problem of banking liquidity has been brought largely into check.

But for investors, the region’s emergence from its recession and the lack of big drama have served as adequate reasons to take advantage of the perceived positive risk-to-reward benefits that have been recently offered by the Eurozone equity markets. And the markets have gained significantly, though not to the level of Wall Street.

How long the present uptrend can remain intact is the key question investors need to ask themselves, which is the obvious question to be asked regardless of which side of the Atlantic you are talking about.

What The Periscope Sees

Here is a list of five Eurozone ETFs that have gained in the solid double digits for the year-to-date. While none of them have quite matched the 2013 performance of the benchmark S&P 500 Index, the returns of these continental ETFs reflect a striking rebound for the beleaguered region.

This upward trajectory could continue if investors are convinced that the Eurozone’s core problems are being dealt with in a legitimate fashion, as opposed to the bumbling efforts of most of the previous two years. And with Mario Draghi seeming to be retaining a firm hand on the rudder of the ECB, it may be a reasonable expectation that the monetary region’s intrinsic flaws may actually be honestly addressed and adequately adjusted.

Here, then, is a list of some of the region’s top performing ETFs year-to-date, as of the end of last week:

EWP — iShares MSCI Spain Index Fund, +27.46%

EWQ — iShares MSCI France Index Fund, +18.91%

FEZ — SPDR DJ Euro Stoxx 50 ETF, + 17.48%

EWG — iShares MSCI Germany Index Fund, +17.33%

EWI — iShares MSCI Italy Index Fund, +17.03%

For those who prefer to use options when available, consider buying calls as an effective tool for leveraging your portfolio’s funds. December 2013 expiration calls, two or three strikes out-of-the-money, can provide an adequate vehicle for the job, at least for the short-term.

Though investors do pay a premium each time a call is bought, the trade-off for potential gains, especially by taking advantage of the leverage that options offer, may make the use of calls worth the price of the premium.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Daniel Sckolnik or Sabrient. Neither Daniel Sckolnik nor Sabrient makes any representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.