A number of European stock indices, most recently the French CAC 40, have been soaring up to multi-year highs on the back of a weaker euro and boosting exchange traded funds tracking these indices.
France’s CAC 40 index has been breaking out to ten-year highs, closing at 5,612 points on Friday 18 May, and soaring up another 0.6% early on Monday morning. To a large extent, this is due to the weakening euro versus the US dollar, with the euro currently buying $1.1731, having fallen 2.3% so far year to date, according to Bloomberg.
The euro is falling partly as a response to signs of economic slowdown in the Eurozone, with the bloc’s economy expanding by just 0.4% in the first quarter of 2018. One of the key driving forces behind European growth, Germany, has seen just a 0.3% GDP expansion in this period, while France also posted a 0.3% growth in Q1, below consensus expectations of 0.4%.
Meanwhile, the political situation in Italy continues to play on investors’ minds. After a week of tense negotiations, the anti-establishment Five Star Movement and the far-right Lega party eventually struck a deal last week, but the future of this coalition remains unclear.
The news has caused an sell-off in both Italian bonds and stocks, with yields on 10-year government debt rising to 2.266% and the FTSE MIB index currently down at 23,227 points, around a 3% fall since the news came out on Friday.
Impact on ETFs
However, the weak euro is good news for the European stock market in the longer run, and over the past month European stocks have been on the rise. Thought investors are worried about the political situation in Europe, the slowdown in the economy is not necessarily bad news, since it means the European Central Bank (ECB) will continue with its easy monetary policy.
The recent strong run in French stocks in particular has boosted ETFs in the sector, which have risen 7% over one month to 17 May, TrackInsight data shows, taking year-to-date returns up to 6.5% after a period of underperformance.
However, the inflows over the period remain negative at -€73.6 million, and cumulated inflows year-to-date are a meagre €22 million.
In European stock ETFs, this picture is even more pronounced. Over one month, the sector’s ETFs are up 5.5%, but outflows are at a whopping €3.1 billion.
Thus, it seems investors continue to be spooked by the situation in Europe, despite the boost enjoyed by a number of European stock markets, and are therefore missing out on the strong returns in European equities.
The currency problem for US-based European ETFs
Meanwhile, for US investors looking to buy US-based ETFs tracking European indices, the problem may be compounded by the currency effect, since the US dollar has been particularly strong.
An example is the iShares MSCI France ETF, denominated in US dollars, is down 0.15% over the month to 17 May, compared to the 6.2% net return from the CAC 40 index in euros over the same period.
Therefore, for US investors it is key to carefully consider currency exposure before buying into European equity ETFs.