EWQ ETF: Inexpensive French Stocks Could Have an Electoral Catalyst

As of July, 2024, the iShares MSCI France ETF (EWQ) presents a compelling investment opportunity, driven by the potential electoral catalyst from the ongoing French legislative elections. The ETF, which includes major French companies like Lvmh Moet Hennessy Louis Vuitton SE, TotalEnergies SE, and Schneider Electric SE, could benefit from the political shifts and economic policies proposed by the right-leaning National Rally. This report will analyze the current market conditions, the potential impact of the elections, and the broader implications for investors considering EWQ.

Market Overview and ETF Composition

The iShares MSCI France ETF (EWQ) is a prominent vehicle for investors seeking exposure to French equities. As of July 2, 2024, the ETF’s largest holdings include:

• Lvmh Moet Hennessy Louis Vuitton SE: 11.16% weight, $71.3 million market value
• TotalEnergies SE: 7.84% weight, $50.1 million market value
• Schneider Electric SE: 6.97% weight, $44.6 million market value

These companies represent a diverse cross-section of the French economy, from luxury goods to energy and industrial automation. The ETF’s expense ratio of 0.5% is relatively high but not uncommon for international funds. Analysts have given EWQ a Moderate Buy consensus rating, with an average price target of $44.89, implying a 14.9% upside potential.

Electoral Dynamics and Market Reactions

The first-round legislative elections in France have resulted in a significant shift in the political landscape. The right-leaning National Rally and a coalition of left-leaning parties have outperformed the incumbent Renaissance Party led by Emmanuel Macron. This political upheaval has already had a positive impact on French stocks, with the CAC 40 Index rallying by 3% following the election results.

The National Rally’s proposed economic policies, such as lowering personal income tax and reducing VAT on electricity and fuel, are seen as market-friendly measures that could stimulate economic growth. These policies could provide a substantial boost to French equities, including those within the EWQ ETF.

Expert Opinions and Market Sentiment

Morgan Stanley strategists have recommended buying French stocks ahead of the second round of parliamentary elections, scheduled for July 7. They argue that the narrowing yield premium on French bonds over German securities indicates a potential market rebound. Morgan Stanley identifies two key scenarios: a no-majority outcome or an absolute majority for the National Rally. In both cases, they expect a recovery in French and wider European equities indices.

However, some investors remain cautious due to the uncertainty surrounding the election results. Gilles Guibout of Axa Investment Managers has not altered his exposure to French banking stocks, citing insufficient visibility on the political landscape post-election. This cautious stance underscores the potential risks associated with the current political volatility.

Broader Market Trends and Economic Indicators

The broader European market has shown signs of recovery, with Euronext reporting a rebound in trading volumes and improved financial performance in 2020. This trend suggests increased investor interest in European equities, including French stocks. Additionally, the growth of the ETF market, as indicated by the increased demand for services from companies like VPS, further supports the attractiveness of ETFs like EWQ.

Despite these positive indicators, the French stock market has faced challenges. The CAC 40 Index has been the worst performer among major European stock indexes since Macron called the snap election. At the height of the selloff, bond-market risk metrics soared to their highest levels since the sovereign debt crisis. However, market stress has since receded, with options markets implying smaller equity moves following the second round of elections.

Implications for Investors

For investors considering EWQ, the current political and economic landscape presents both opportunities and risks. The potential for market-friendly policies from the National Rally could drive significant gains in French equities. The ETF’s diverse holdings, including companies with robust earnings outlooks and substantial revenue generated outside Europe, provide a buffer against domestic geopolitical turmoil.

However, the uncertainty surrounding the election results and the potential for a hung parliament could lead to prolonged political gridlock. This scenario could hinder France’s ability to address its budget deficit and implement pro-business reforms, potentially dampening investor sentiment.

Key Insights and Future Developments

1. Electoral Catalyst: The ongoing legislative elections in France could serve as a significant catalyst for French stocks, particularly if the National Rally’s market-friendly policies are implemented.
2. Market Sentiment: While some investors remain cautious, the overall market sentiment appears to be improving, with narrowing bond yield premiums and positive analyst ratings for EWQ.
3. Economic Resilience: French companies within the EWQ ETF have demonstrated resilience, with strong earnings outlooks and substantial revenue generated outside Europe, mitigating the impact of domestic political volatility.
4. Potential Risks: The primary risk for investors is the uncertainty surrounding the election results and the potential for political gridlock, which could impede economic reforms and fiscal stability.

Conclusion

iShares MSCI France ETF (EWQ) offers a promising investment opportunity, driven by the potential electoral catalyst from the ongoing French legislative elections. The ETF’s diverse holdings, positive market sentiment, and the potential for market-friendly policies from the National Rally provide a strong case for investment. However, investors should remain cautious and closely monitor the political landscape, as the potential for prolonged gridlock poses a significant risk. Overall, EWQ presents a balanced risk-reward profile, with the potential for substantial gains if the political and economic conditions align favorably.