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ETFs in Focus as France GDP Growth Slows

The French economy grew 0.5% sequentially in the July-September period and 2.2% on a year-over-year basis. Although quarterly growth rate was below expectations, year-over-year GDP growth was at a six-year high.


What’s Driving GDP?


Household consumption expenditure grew 0.5% in the quarter compared with 0.3% in the previous quarter. Moreover, positive inventory changes contributed 0.5 points to GDP growth.


However, export growth slowed to 0.7% compared with 2.5% in the second quarter. Moreover, imports grew 2.5% in the quarter, pruning 0.6 points off GDP.


Despite the slowdown, GDP growth is expected to comfortably surpass Emmanuel Macron’s 1.7% target and help him in bringing down France’s deficit under 3% in accord with EU rules (read: ECB's Dovish Taper Boosts These ETFs).


Economic Reforms


Macron is seen as a business-friendly president. Earlier in October, Macron revised labor rules that give French companies the power to negotiate. Moreover, his reform invited limited protests, which is a good sign for the 39-year old former investment banker, as he pushes for further policy changes in Europe’s second-largest economy.


Earlier last week, the French government published its first budget since Macron took office. The budget included 7 billion euros in tax cuts and reduced France’s wealth tax on everything except property assets. Per a Financial Times article citing Finance Ministry data, the top 1% of French households are expected to derive 44% of the benefits of the tax cuts.


This has invited widespread criticism for Macron, as his opponents call him a President not for the masses, but for the rich. Per an Express article citing BVA poll for La Tribune and Orange data, Macron’s approval rating declined 20% to 42% from his election victory. However, Macron says his reforms are aimed at making investments in the French economy attractive for foreigners, in order to boost GDP and reduce unemployment.


Per Labour Ministry's statistics, unemployment dropped 1.8% on a monthly basis in September. Number of people looking for work declined 64,800. This is a positive for Macron. Therefore, despite all the possible downsides, investors remain upbeat about the potential of Macron and of his capability to deliver on his promises.


Let us now discuss the most popular ETF focused on providing exposure to the French economy (see all European Equity ETFs here).


iShares MSCI France ETF EWQ


This ETF is a pure play on French equities and provides exposure to large and mid-sized companies in France.


It has AUM of $677.4 million and charges 48 basis points in fees per year. From a sector look, Industrials, Consumer Discretionary and Financials are the top three allocations of the fund, with 20.4%, 18.1% and 15.2% exposure, respectively (as of Oct 27, 2017). Total SA, Sanofi SA and BNP Paribas SA are the top three holdings of the fund, with 8.4%, 6.9% and 5.7% exposure, respectively (as of Oct 30, 2017). It has returned 27.2% year to date and 30.5% in a year (as of Oct 31, 2017). It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.


Let us now compare the performance of this ETF to a broad Europe based ETF, EZU.


iShares MSCI EMU ETF EZU


This ETF is a play on developed European economies using the common currency with a focus on large and mid-cap equities (read: 5 ETFs to Buy and Hold for 5 Years).


It has AUM of $14.5 billion and charges 48 basis points in fees per year. The fund has a 32.6% allocation to France, 29.6% to Germany and 11.1% to Netherlands (as of Oct 27, 2017). From a sector look, Financials, Industrials and Consumer Discretionary are the top three allocations of the fund, with 20.5%, 14.7% and 13.7% exposure, respectively (as of Oct 27, 2017). Total SA, SAP and Siemens AG are the top three holdings of the fund, with 2.7%, 2.3% and 2.3% exposure, respectively (as of Oct 30, 2017). It has returned 17.0% year to date and 30.6% in a year (as of Oct 31, 2017). It has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.


Below is a chart comparing the performance of the two funds.


 
Source: Google Finance


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ISHARS-FRANCE (EWQ): ETF Research Reports
 
ISHARS-EMU IDX (EZU): ETF Research Reports
 
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