Assets Under Management AUM

iShares MSCI Germany ETF: Low On Energy (NYSEARCA: EWG)


The energy is contagious. – Alex Elle


The iShares MSCI Germany ETF (NYSEARCA: EWG), with $1.36 billion in assets under management (“AUM”) and 26 years of trading history, offers exposure to more than 60 large and mid-cap German stocks. Unfortunately, this year turned out to be something a disaster for this pillar of exchange-traded funds (“ETFs”), since it sold 30% of its market capitalization. As a result, it has also underperformed not only European equities (by 1.6x), but also global equities (by 2.1x), which themselves have had rather uninspiring years. Could we see a repeat of this underperformance?



Well, if there are any silver linings to spot, it’s when it comes to forward valuations. Just for some perspective, EWG is currently only trading at a forward P/E of 9.69x; Conversely, the Vanguard Total World Stock ETF, which focuses on over 9,500 global stocks, is trading at 14.5x, while the iShares Europe ETF, which covers 385 European stocks, is trading at 11.43x .

The attractive valuation differential between EWG and these other alternatives might entice some bargain hunters to join us. But then again, valuations are only one facet of the German universe, and I’m afraid there are other pressing issues that could weigh on EWG.

The energy crisis

At the heart of Germany’s current malaise is an energy crisis, something I delved into in my chat with Alexander Stahel on Lead-Lag Live. I’d like to believe that’s going to be the biggest short-term driver of economic performance there.

Natural gas is the most popular heating source in Germany, lighting almost 20 million homes, which is almost half of the total number of homes. This need not necessarily be a problem if the country enjoyed strong energy independence thresholds, but that is hardly the case here.



As shown in the image below, it is highly dependent on imports from Russia, which contribute between 50-75% of total gas imports.

Natural gas


Russia recently announced that it will take the Nord Stream 1 gas pipeline offline at the end of this month to address maintenance issues. There’s history here, as about a month ago they did something similar to only bring the capacity down to about 20%. The urgency with which they resorted to another maintenance break makes me wonder if things will ever return to normal. In fact, Bloomberg-linked sources close to the Kremlin suggest that Russia will continue to keep flows to Europe minimal as long as the Ukraine fiasco continues to rumble on. Energy analysts Wood Mackenzie suggest that persistent capacity of just 20% could push conditions in Germany into the “danger zone”. Nonetheless, it has put Germany in a particularly vulnerable position, with Reuters reports showing it wants to source gas “just about anywhere”.

Canada now appears to be the leading candidate to help fill the gas gap for Germany, but investors should consider that this is unlikely to be resolved overnight, as the former currently has no LNG terminals and is currently boosting its natural gas. gas export capacity.

Overall, this energy crisis has wiped out economic sentiment in Europe’s largest economy; As noted in the Lead-Lag report, the ZEW indicator fell to its lowest point in 14 years. In addition, a survey of 3,500 German companies by DIHK showed that 16% of industrial companies are looking to shut down their activities or reduce production. If this crisis persists for a few months, expect more companies to join the movement.






We also need to keep an eye on currency dynamics as we recently saw the dollar hit 20-year highs. As noted in The Lead-Lag Report, while fast-growing recessionary conditions may prevent the US Fed from committing to large 75 basis point hikes, we have by no means reached a scenario where the Fed could pivot and lower rates. Rate hikes will likely be a recurring facet for the foreseeable future, and these tougher terms will only make the dollar more scarce, further enhancing its appeal.

Meanwhile, the European Central Bank’s primary refinancing rate is still at a paltry figure of just 50 basis points, and that is unlikely to change the dial on inflationary conditions. Markets also appear to be only pricing in a 100 basis point increase by mid-2023. This implies that the priority in Europe is above all to avoid a recession, controlling inflation taking second place.

Overall, the reluctance to be as aggressive as the US Fed is not reflected well in the EUR/USD pair, which recently broke parity and appears to be in freefall.

To conclude, if the valuation differential of EWG seems attractive, the fundamentals seem in bad shape, which encourages me to be cautious on EWG

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