Strategist upgrades France

Amid downgrades of European nation, iShares goes against the grain.

By Benzinga Nov 21, 2012 12:00PM

CorbisBy The ETF Professor


On Monday, Moody's Investors Service stripped France, the eurozone's second-largest economy behind Germany, of the prestigious AAA credit rating. Citing a murky fiscal condition and contracting economy, Moody's lowered France's credit rating one notch to Aa1. The ratings agency holds a negative outlook on France.


In the near-term, the loss of the AAA rating might be enough to chase some investors out of French equities, but it is worth noting that these stocks have been decent performers this year. Amid significant domestic and eurozone headwinds, the iShares MSCI France Index Fund (EWQ) has jumped almost 12.2% year-to-date.


Some analysts are now taking a more bullish view of French stocks. For example, iShares Global Chief Investment Strategist Russ Koesterich upgraded France to "overweight" from "neutral," citing attractive valuations.


"French equities are now looking attractively valued. At a price-to-book multiple of 1.14, France is 14% below its%-year average, and is offering a 31% discount to the MSCI World Index, and a 15% discount to Germany," Koesterich wrote in a blog post.


EWQ, the lone France-specific ETF, has a price-to-earnings ratio of 16.1 and a price-to-book ratio of 1.7. That compares favorably with the iShares MSCI Germany Index Fund, which has a price-to-earnings ratio of almost 18.6 and a price-to-book ratio of nearly 2.1, according to iShares data.


Pharmaceuticals giant Sanofi (SNY) and Europe's third-largest oil company, Total (TOT), combine for 21.5% of EWQ's weight. EWQ is diversified among several sectors, a favorable factor not often found in many country-specific ETFs.


"The broad French market is well diversified with no single sector accounting for more than 16% of the MSCI France Index, and the deep discount in non-financial sectors compared to peers in Germany and the rest of developed Europe is in our view hard to justify," according to Koesterich.


Financial services names represent about 15.6% of EWQ's weight, while industrials account for 14.9%. Consumer discretionary companies are allocated 13.2%, while health care and energy stocks each represent more than 12% of the fund's total weight.


Despite the sector diversity, with financials being the largest sector weight, EWQ can at times be beholden to macroeconomic concerns. The ETF was hit last month when Standard & Poor's downgraded several French banks (Benzinga link here). The affected institutions included BNP Paribas, Credit Agricole S.A. and Societe Generale. That trio combines for 8.25% of EWQ's weight.


"Across Europe, the state of the financial sector is a concern," wrote Koesterich. "Indeed, I would balance the France overweight with European financial sector underweight in order to help mitigate specific risk linked to financial sectors."


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