iShares Strategist Upgrades France

On Monday, Moody’s Investors Service stripped France, the eurozone’s second-largest economy behind Germany, of the prestigious AAA credit rating. Citing a murky fiscal condition and contracting, Moody’s lowered France’s credit rating one notch to Aa1. The ratings agency holds a negative outlook on France.

In the near-term, the loss of the AAA rating might be enough to chase some investors out of French equities, but it is worth noting these stocks have been decent performers this year. Amid significant domestic and eurozone headwinds, the iShares MSCI France Index (NYSEARCA:EWQ) has jumped almost 12.2 percent year-to-date.

iShares Dow Jones US Home Const. (ETF) (NYSEARCA:ITB)

Some analysts are now taking a more bullish view of French stocks. For example, iShares Global Chief Investment Strategist Russ Koesterich upgraded France to Overweight from Neutral, citing attractive valuations.

“French equities are now looking attractively valued. At a price-to-book multiple  of 1.14, France is 14% below its %-year average, and is offering a 31% discount to the MSCI World Index, and a 15 percent discount to Germany,” Koesterich wrote in a blog post.

iShares MSCI France Index (NYSEARCA:EWQ), the lone France-specific ETF, has a price-to-earnings ratio of 16.1 and a price-to-book ratio of 1.7. That compares favorably with the iShares MSCI Germany Index Fund, which has a P/E ratio of almost 18.6 and a price-to-book ratio of nearly 2.1, according to iShares data.

Pharmaceuticals giant Sanofi SA (NYSE:SNY) and TOTAL S.A. (NYSE:TOT), Europe’s third-largest oil company, combine for 21.5 percent of EWQ’s weight. One point in favor of iShares MSCI France Index (NYSEARCA:EWQ) is sector diversity, something that is not often found with many country-specific ETFs.

“The broad French market is well diversified with no single sector accounting for more than 16 percent of the MSCI France Index, and the deep discount in non-financial sectors compared to peers in Germany and the rest of developed Europe is in our view hard to justify,” according to Koesterich.

Financial services name represent about 15.6 percent of EWQ’s weight while industrials account for 14.9 percent. Consumer discretionary names receive an allocation of 13.2 percent while health care and energy names each represent more than 12 percent of the fund’s total weight.

Despite the sector diversity, with financials being the largest sector weight, iShares MSCI France Index (NYSEARCA:EWQ) can at times be beholden to macroeconomic concerns. The ETF was hit last month when Standard & Poor’s downgraded some French banks. The affected institutions included BNP Paribas, Credit Agricole S.A. and Societe Generale. That trio combines for 8.25 percent of EWQ’s weight.

“Across Europe, the state of the financial sector is a concern,” wrote Koesterich. “Indeed, I would balance the France overweight with European financial sector underweight in order to help mitigate specific risk linked to financial sectors.”

This article was originally written by The ETF Professor, and posted on Benzinga.