Roughly a month ago, we wrote an article about how the downturn
in the Spanish market was continuing, pushing the main Spanish ETF,
EWP, down significantly to start the year.
However, it appears as though the pain in the Spain ETF was just
beginning, as the product has slumped heavily since the start of
May and is in the neighborhood of its 52 week lows.
In fact, it is making the fund’s performance to start the second
quarter of the year look downright bullish. During that time frame,
the popular product lost about 8.7% compared to a roughly 15% slump
since the start of May (see UK ETF Investing 101).
Thanks to these kinds of performances, the product has lost
close to 28% in the past three months alone far outpacing many
other European ETFs on the downside during the same time frame.
This has put the product into second place in terms of total
negative returns so far in 2012 with only Greece having a worse
start to the year.
With this kind of pain, some long term focused investors might
be thinking about making a play on Spain at this time. After all,
EWP is currently sporting a P/E below 8.8 while the price/book and
price/sales ratios are both below 1.0 at this time. This could
suggest that some decent values are beginning to develop for
investors with a high risk tolerance (read Is It Time To Buy
Europe?).
Unfortunately, one has to wonder if it is time to jump into
Spain just yet, as evidenced by recent comments from the country as
well as the lack of progress on either broad euro zone or G-7
market intervention.
Seemingly without a backstop from stronger European nations,
Spain and other PIIGS markets could face some more trouble in the
near future. Meanwhile, a recent ‘emergency’ G-7 meeting appeared
to resolve little either suggesting that unless a deal was worked
out in secret, it will be up to the euro zone to figure out how to
get some of the world’s biggest economies out of their current
predicament.
This situation appears to be rapidly approaching an end game
scenario (finally) as the rhetoric out of Spain seems to be
increasingly dire. Earlier this week the Spanish Treasury minister
suggested that the markets were shutting the country out of the
fixed income world and that broad European help would be needed to
assist the banking sector (see Three European ETFs That Have Held
Their Ground).
The timing of the statement seems a little odd as it comes right
before a debt auction on Thursday, potentially spooking market
participants who were already shaky about Spain’s prospects.
Current yields are now firmly above the 6.0% mark—roughly at 6.3%
at time of writing—and are near the highest level investors have
seen since late November of 2011.
"The market is quite nervous still, these remarks will make the
auction more difficult," said Emile Cardon, market economist at
Rabobank in a Reuters article.
Beyond this, concerns are also building over the government’s
ability to push capital to struggling private banks without more
euro zone help. Already, it looks as though Bankia will receive
about 19 billion in euros while speculation is building that about
40 billion in euros of additional capital for the rest of the
Spanish banking sector in order to shore up the space.
While this isn’t a huge sum when compared to the vastness of the
Spanish economy, or especially the broad euro zone economy, which
is nearly equal to that of the United States, it is a troubling
amount nonetheless. This is even more apparent when considering
that Spain can’t really sustain the current debt load at rates
approaching 6.5%, implying that a broader bailout of Spain might be
necessary.
Since Germany seems unwilling—at least on the surface—to do
this, Spain’s troubles look likely to continue at least in the near
term. However, a bailout does still seem likely at this time, as
costs are relatively low at this stage and major European nations
cannot afford the euro crisis and a default to reach Spain and
eventually Italy (read Is the Italy ETF Next?).
If that happens, a situation which would engulf two of the
biggest 20 economies in the world, a near depression seems likely
to ensue in Europe, a scenario that even Germany will want to
avoid.
Thanks to these trends, it is probably not time to get in on
Spain just yet as there is still too much risk in the market.
Whether the Spanish ETF, however, is doomed seems to be another
story as northern European nations seem poised to eventually ride
to the rescue for Spain and many of the other PIIGS nations.
Instead, it could be an ideal time to load up on the European
nations that have managed to maintain some level of strength during
this time. A look outside the euro zone may produce a few choices,
although it looks as though oil-dependent economies might not be
the best choice with severe weakness in broad commodity
markets.
Beyond these equity markets, a closer look at some of the German
bond ETFs could also be a safe place to maintain capital at this
time in the European market. Currently, investors have three
choices; BUNL, BUND, and
GGOV, to choose from, all of which might not be
the most heavily traded but can provide targeted exposure to the
bond market of the region’s strongest country (read Follow Buffett
With These Developed Market Bond ETFs).
Over the past month, all three of these have held up nicely,
easily trouncing their equity counterparts in the time frame. As a
result, for investors who think Spanish ETF pain may continue to
sink the broad European market, a look at any of these bond ETFs
may be a better choice for those seeking euro zone exposure while
Spain and the rest of the EU attempts to sort out their many issues
before a true crisis develops on the continent.
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PIMCO-GER BIF (BUND): ETF Research Reports
PWRSH-DB GBF (BUNL): ETF Research Reports
ISHARS-SPAIN (EWP): ETF Research Reports
PRO-GRMN SOV/SS (GGOV): ETF Research Reports
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