Finding Value in a European Resurgence

Ahmed Farooq, CIMA®, CFP

Ahmed Farooq, CIMA®, CFP
Vice President - ETF Business Development at Franklin Templeton Canada

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With stage three rollout in Ontario, it is going to be interesting to see how we integrate back into new societal norms, allowing people back into our homes and potentially heading back to work. At this stage, I’m optimistic that we are closer to the end of this pandemic than the start. I attribute this mainly to the success of the vaccine rollout; here in Canada, 26.8 million people, or 82.98% of those eligible (age 12 and over) have received at least one dose and 21.4 million people, or 64% are fully vaccinated. Many other countries, particularly in the developing world, would look at those rates with envy, so the massive challenge we now face is achieving more equitable distribution of vaccines worldwide.

In the investment world, fiscal and monetary stimulus continues to act as a vital counterbalance to the uncertainty of the pandemic. The recovery in U.S. stocks since the crash at the outset of this crisis has spurred markets on to new record highs. A bear market turning bull is clearly good news, especially when you consider the severity of the drawdown last year, but it is also true that this reversal has led to some pretty elevated valuation levels. For this reason, many investors are now looking elsewhere for growth opportunities for their portfolios.

In contrast to the record-breaking 10+-year bull run in U.S. equities, European markets have had a tougher time since the Great Financial Crisis (GFC) of 2008. With the EU seemingly lurching from one crisis to the next, the future of the world’s largest trading bloc has often been in doubt. This uncertainty allowed U.S. equities to pull far ahead of their European counterparts, but there are signs that this scenario won’t be repeated in the 2020s

During the pandemic, the stimulus delivered by the European Central Bank (ECB) has had something of a galvanizing effect among EU member states. The European project had been on shaky ground, particularly after the shock of Brexit, but the joint issuance of Eurozone debt over the past 18 months has created a more integrated fiscal union. This in turn has boosted the euro's long-term prospects, and this could act as a catalyst for lower risk premiums with European assets heading forward.

The pan-European Stoxx 600 reached a record high in mid-July, driven by the performance of the financial services and utilities sectors. It appears likely that the cyclical boost that has driven U.S. markets during its vaccine rollout is likely to be repeated across the Atlantic in the second half of the year. Of course, COVID variants remain a huge concern, but as Europe’s vaccination program gathers pace, its economy will benefit in kind, creating a whole host of new investment opportunities.

These opportunities are central to the investment strategy of Franklin FTSE Europe ex U.K. Index ETF (FLUR), which provides targeted exposure to the kind of large and mid-sized companies likely to drive economic growth in the years ahead.

With a low-cost fee of 9bps that compares favourably with its competitors, this solution has delivered a one-year return of 26.58% and has provided a YTD return of 8.63% as of June 30th.

The United States has been the undisputed global leader on equity performance since 2008. Prior to that, international equities outperformed the U.S. for close to a decade, which shows that everything moves in cycles. Various headwinds remain for European stocks, COVID-19 key amongst them, but should the pandemic be brought to heel in 2021, there is great growth potential for equities on the continent.

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What Are the Risks?

Commissions, management fees and expenses may all be associated with investments in ETFs. Investors should carefully consider an ETF’s investment objectives and strategies, risks, fees and expenses before investing. The prospectus and ETF facts contain this and other information. Please read the prospectus and ETF facts carefully before investing. ETFs trade like stocks, fluctuate in market value and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. Performance of an ETF may vary significantly from the performance of an index, as a result of transaction costs, expenses and other factors. The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

Ahmed Farooq’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinions and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.

All investments involve risks, including the possible loss of principal. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in emerging markets, of which frontier markets are a subset, involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size, lesser liquidity and lack of established legal, political, business and social frameworks to support securities markets. Because these frameworks are typically even less developed in frontier markets, as well as various factors including the increased potential for extreme price volatility, illiquidity, trade barriers and exchange controls, the risks associated with emerging markets are magnified in frontier markets. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions.