VGK Vanguard FTSE Europe

2013 was a big year for Europe with the debt-ridden Euro zone coming out of recession in the second quarter.  While most headlines were snatched by big names like Germany, France and Italy, one overlooked nation – Austria – rewarded investors with solid returns.

The only pure play on this market – iShares MSCI Austria Capped ETF (EWO) – added about 6% in the early days of 2014 on top of the 11% gain last year.  To add to this, the fund never tanked last year, and hovered in a tight range of $16.08–$20.24 all though 2013.

What’s Behind This Resilience?

Shrinking Trade Deficit: Austria is heavily dependent on exports for its economy. Moreover, with muted private consumption in recent years thanks to sluggish employment growth, feeble real incomes and on-going deleveraging (as per OECD), the country has grown more and more export-reliant.

With exports of goods and services accounting for a little less than three-fifth of total GDP (57% as of fiscal 2012), Austria remains vulnerable to the health of its major trading partners. The country trades a great deal with Germany (around 30%), ensuring that it is heavily exposed to one of the region’s top economies.

Notably, Germany was considered one of the most fiscally stable economies in the Euro zone even during the historic debt-debacle (read: Time for This Top Ranked German ETF?). 

Germany, a major component of the region, started walking on the growth path since the beginning of 2013, indirectly giving a reason to be bullish on Austria’s GDP view. Beyond Germany, Italy, France and the Czech Republic contribute to Austria’s export profile among EU nations.

Lately, the massive drop in Austrian trade deficit corroborates this fact. The latest data shows that the trade deficit shrank in October 2013 considerably to EUR 97.6 million from EUR 793.06 million logged in the year-ago period. Exports grew 6.3% last October while imports nudged up 0.2%.

Decent Unemployment & Inflation: The country appears to score remarkably well on the employment front. In 2012, joblessness in Austria was 4.4% which came in stark contrast to the Euro Area average of 11.3%, putting Austria into rare company on the unemployment front.

In fact, the nation’s unemployment rate didn’t even spike during the Euro zone catastrophe as it hovered within the range of 4.2% to 4.8% in the 2009–2012 period.

While the entire continent is struggling to spur inflation, Austria has often been blamed for rising inflation which put a lid on its real income growth. Though it was very much contained at 2% in 2013, OECD expects the rate to decline to the 1.5% range by 2015. In fact, Austrian inflation has fallen for six straight months of the second half of 2013.

Improvement in GDP Outlook: The GDP picture is getting clearer. The Austrian economy witnessed recession only in 2009.

OECD predicts growth to pick up from 2014 with the nation growing 1.7% in 2014 and 2.2% in 2015 against Euro zone growth of 1% and 1.6%, respectively. This will perk up the country’s private consumption.

Debt-to-GDP outlook was also favorable. While at the end of 2Q13, the government debt to GDP ratio in the Euro area stood at 93.4%, Austria debt-to-GDP ratio stood at about 75.3%.

Austria currently boasts one of highest per capita GDPs in all EU nations. Even during the Euro zone crisis, the Austrian economy fared somewhat better. So investors seeking a safe haven in Euro zone can invest in the Austrian ETF.

EWO in Focus

EWO, which made its debut in late 1996, looks to deliver the return of the MSCI Austria Investable Market Index. The product is an overlooked choice as it has mustered only $108 million in AUM. With 28 stocks in its basket, this fund from iShares puts as much as 66% of its total assets in the top 10 holdings, suggesting higher concentration risk.

The financial sector actually makes up two-fifth of the portfolio, leaving around 23% for industrials followed by 15% for materials. This multi-cap fund has a value tilt. The ETF charges 49 bps in annual fees. The fund currently carries a Zacks ETF Rank #2 (Buy).

The returns of EWO outperformed the funds of some top nations in Europe including iShares MSCI Germany (EWG), iShares MSCI United Kingdom (EWU), iShares MSCI Switzerland Capped Index (EWL) as well as broader European funds like SPDR EURO STOXX 50 (FEZ) and Vanguard FTSE Europe ETF (VGK) over the past 6-months.

Bottom Line

Given this upbeat trend, it is hard not to feel optimistic about the Austrian economy right now. Its all-important trade data is favorable and economic indicators are better than many other European nations, suggesting that this often-ignored nation may be a wise bet for 2014 (read: Ride Europe Higher with This Top Ranked ETF).

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ISHARS-GERMANY (EWG): ETF Research Reports
 
ISHARS-AUSTRIA (EWO): ETF Research Reports
 
ISHARS-UTD KING (EWU): ETF Research Reports
 
SPDR-EU STX 50 (FEZ): ETF Research Reports
 
VANGD-FTSE EUR (VGK): ETF Research Reports
 
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