EWQ: France Is The Pick Of Europe

seekingalpha02-02

Domestically, the French economy remains as lackluster as it's ever been.Its equities, on the other hand, screen quite attractively.Even after the 2023 rally, French large caps offer good upside ...

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The year may have started off on a tricky note amid elevated political risks, but a Q4 rally, largely due to the market pricing in a US/EU monetary easing pivot, saw the iShares MSCI France ETF (NYSEARCA:EWQ) finish sharply higher. Impressively, this was achieved despite French luxuries, traditionally the key reason to own EWQ, being a large net drag on performance. The market may have de-rated the sector on cyclical macro concerns, particularly in China, but luxury goods remain a structurally attractive place to be, in my view. Few groups of companies can match the brand/pricing power inherent in their business models. These companies also still offer plenty of cash generation through the cycles, along with downside protection via their well-capitalized balance sheets. Tema The rest of the EWQ portfolio may not have quite the same pricing power, but at a historically discounted low teens forward earnings multiple (vs. high-single-digits % bottom-line growth through 2025), the fund isn't all that pricey, in my view. Net-net, even after the 2023 rebound, current levels still offer an attractive entry point into one of Europe's top-performing equity markets. Data by YCharts iShares MSCI France ETF Overview - A Competitively-Priced French Investment Vehicle The iShares MSCI France ETF, which tracks the MSCI France Index, retains scarcity value as the only large pure-play French fund listed in the US. Still, its fee structure remains a very competitive 0.5% - albeit on a smaller ~$665m net asset base (down from ~$1bn last year). Spreads are also as tight as they've ever been at ~3bps, helped by the strong >$600m average daily trading volume (30-day trailing basis). From an overall expense/cost perspective, investors get plenty of bang for their buck with EWQ. iShares The makeup of EWQ remains largely unchanged from a sector perspective. Industrials are still the largest allocation at an upsized 23.5%, though Consumer Discretionary has been downsized to 19.8% following the luxury goods underperformance last year. Combined with Consumer Staples (10.6%), though, the fund retains a sizeable exposure to world-leading consumer names at a cumulative ~30%. The rest of the portfolio comprises Financials (higher at 10.3%) and Healthcare (unchanged at 10.1%). iShares On a single-stock basis, the EWQ portfolio is spread out across a slightly narrower 61 holdings. The largest holding at 11.9% remains global luxury goods leader LVMH Moët Hennessy - Louis Vuitton, Société Européenne (OTCPK:LVMUY) - despite a challenging 2023. French energy conglomerate TotalEnergies SE (TTE) also remains a major holding, albeit at a smaller 7.7%, with the most notable shift being personal care company L'Oréal S.A. (OTCPK:LRLCY) moving up to third-largest at 6.0%, replacing pharmaceutical multinational Sanofi (SNY) (unchanged at 5.9%). There isn't any one large industrial holding, with the biggest exposure being to conglomerates Schneider Electric S.E. (OTCPK:SBGSF) and Airbus SE (OTCPK:EADSF) at 5.5% and 4.9%, respectively. With one holding over 10% and six holdings over the 5% allocation threshold, it's worth noting that EWQ carries higher concentration risks than comparable European ETFs - by comparison, iShares Europe ETF (IEV) and iShares Core MSCI Europe ETF (IEUR) have no single holdings over 5%. iShares iShares MSCI France ETF Performance - A Serial Compounder Through the Cycles The ETF is about flat on a year-to-date basis, though it did end 2023 on a high note (+21.7% in NAV and market price terms). In aggregate, EWQ has compounded at a steady +6.9% rate in market price and NAV terms since its inception in 1996. Of note, returns have been front-loaded - relative to a particularly strong last five years at +11.1%, the fund's total annualized return over the last decade stands at a lower +6.0%. So even though EWQ comes with a fair bit of volatility, not helped by its exposure to cyclical sectors like Industrials and Consumer Discretionary, the reward has more than outweighed the risks. iShares Distributions remain cyclical and are, thus, unsuitable for investors who prioritize steady income. But at 2.7% on a trailing twelve-month basis (~2.0% on a 30-day SEC basis), it is a nice bonus to the fund's capital appreciation. Similarly, value-focused investors may not find the high-teens trailing P/E (low-teens forward P/E) all that attractive vs lower multiple European ETF alternatives. Those willing to underwrite a steady high-single-digit % earnings growth through 2025 (per consensus estimates) and further positive revisions, on the other hand, should find plenty to like here. Yardeni France is the Pick of Europe  For all of France's domestic economic problems, its large-cap equities have proven to be serial outperformers through the cycles. A key reason for this is not only the low domestic exposure (relative to international income streams) but also the outsized exposure to the world's best luxury goods companies - a key structural differentiator vs. its euro-area counterparts. While luxuries have underwhelmed in recent months, it's hard to bet against the compounding potential of luxuries long-term; given their intact fundamentals and pricing power, the current historical valuation discount should correct over time. The rest of the high-quality EWQ portfolio isn't too bad either, as reflected in the forward high-single-digit % earnings growth trajectory. Having de-rated to a low-teens earnings multiple, the French risk/reward screens quite attractively relative to the rest of Europe.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2408466296"}