Economists worldwide continue to raise their forecasts for the economies of European countries as well as the region as a whole. In particular, the International Monetary Fund (IMF) hiked its 2013 prediction for the 17 country euro-zone from a contraction of 0.6% to a contraction of 0.4%. Absolute numbers notwithstanding, the direction represents improvement.
The expectation for 2014 has been increased as well. The IMF sees slightly more robust growth at 1.0% whereas the projection in July had been 0.9%.
Are things really looking up? Forward-looking equity markets seem to think so. After an inauspicious first half, Vanguard FTSE Europe (VGK) appears to have hit bottom in late June. Since that time, VGK has catapulted 17% off its lows. It has also bounced higher off support levels at its 50-day trendline in late August as well as October.
Positive price gains notwithstanding, ETF fund flows in the first half of October are equally impressive. Three of the top 10 ETF fund flow recipients over the last two weeks are popular European benchmarks — iShares MSCI EAFE (EFA), iShares MSCI EMU (EZU), and Vanguard FTSE Europe (VGK).
On the other hand, investors may be missing a bit of opportunity here. The “risk-on” trade is not merely favoring international over domestic during the U.S. government shutdown uncertainty. It has also favored small-caps over large caps. Why not look to some of the small-cap benchmarks in the international arena?
For example, since the very same June lows for VGK mentioned earlier, the momentum for iShares MSCI EAFE Small Cap (SCZ) has been much greater. In the SCZ:VGK price ratio below, one can see the impressive uptrend in SCZ’s relative strength.
Unlike the questionable fundamentals on U.S. small caps, iShares MSCI EAFE Small Cap (SCZ) boasts a price-to-book of 2.85, dividend yield of 2.75% as well as less beta volatility than the S&P 500. The current price is solidly above both a 50-day and a 200-day moving average. The 19% gains off of the June lows aren’t too shabby either.