Reasons for Optimism in the European Markets

Some market observers believe Europe is ready for its closeup in the reopening trade conversation. If that prognosis proves accurate, it could be meaningful for an array of exchange traded funds, including the First Trust Eurozone AlphaDEX ETF (NasdaqGM: FEUZ) .

Source: Reasons for Optimism in the European Markets

FEUZ, which tracks the Nasdaq AlphaDEX® Eurozone Index, could be one of the prime beneficiaries as economies such as Germany and France join the U.S. and China in rebounding from the ill effects of the coronavirus pandemic. Some might argue the Eurozone is overdue to do just that.

“The restart of economic activity is real and broadening. This supports our pro-risk stance and our underweight in government bonds as we believe their low yields don’t reflect the restart’s momentum,” said BlackRock in a recent research report. “We see the U.S. passing the baton to Europe and other DMs in leading the restart, whereas the delta variant may challenge some EMs lagging in vaccinations. This supports Original Postublications/outlook" target="_blank" rel="noreferrer noopener">our tactical overweight in European equities.”

Upside Potential in Europe

FEUZ, which holds almost 150 stocks, is higher by 13% year-to-date. While that lags the returns of broad U.S. equity benchmarks, it’s not a guarantee that laggard status will remain in place through the end of 2021.

What could propel FEUZ to more upside as 2021 moves along is the European simply catching up to the U.S. The U.S. economy is currently in the midst of post-pandemic growth spurt – one that hasn’t made its way to Europe as of yet. However, some data points indicate green shoots are emerging across the Atlantic. FEUZ could also be a better bet than some emerging markets (EM) funds.

“Growth momentum in the euro area appears to be catching up now, as indicated by purchasing managers’ index (PMI) data,” said BlackRock. “In contrast, the EM PMI this year has trended lower toward 50 – a reading below which suggests stagnation – reflecting challenges in many EMs where renewed outbreaks threaten lockdowns and more dire public health outcomes.”

Another catalyst for FEUZ is earnings. European earnings revisions are trending the right way and that could prove to be good news for the First Trust ETF.

“About 90% of MSCI Europe companies have reported earnings, with just over half of them beating estimates. The earnings revision ratio – the share of earnings estimate upgrades vs. downgrades – has been rising in Europe and catching up with that in the U.S. This supports our overweight on European equities and neutral position in U.S. equities on a tactical basis,” adds BlackRock.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.