Contrarian Play: Austria ETF (EWO) Unfairly Hit By Hungarian Crisis

by on June 9, 2010 | ETFs Mentioned:

Late last week, news out of the central European nation of Hungary riled markets when the recently-elected prime minister announced that country could very well default and that the economy was in much worse share than the previous administration had conveyed. Noting that Hungary had a “slim chance” to avoid a “Greek situation,” prime minister Viktor Orban caused anxiety among investors around the world to spike. This news, along with a weak jobs report here in the U.S., sent shares plunging, with major benchmarks slipping by close to 3% on the day. One of the ETFs most impacted by this development has been the iShares MSCI Austria Index Fund (EWO), which has sunk by almost 9% over the last week and is now down close to 30% over the past four months (see Austria ETF Sinks On Fears In Neighboring Hungary). As one of the closest economies to Hungary geographically, Austria has been identified as one of the potential casualties of an economic collapse or another prolonged downturn.

While the Hungarian situation is troubling, the big selloffs may have created an attractive buying opportunity, especially in Austrian equities. Orban recently announced spending cuts and public-spending freezes, and looks to meet this year’s deficit goal of 3.8%. Additionally, the country’s debt level may reach 79% of GDP this year–a high number but one on par with Germany, considered to be one of the economies on the strongest fiscal footing in Europe. This debt level also compares favorably with other nations of Europe, which have been in crisis mode as of late such as Greece (125%), Italy (118%),  or even Portugal (86%). Furthermore, this debt level is far less than the U.S. and the deficit goal is roughly one-fourth the U.S. budget deficit, suggesting that Hungary is in a far better economic position than the United States. The country has also shown that it can cut spending when it has to, something that many other countries seem to have significant trouble accomplishing. For example, the country has slashed its budget from 9.3% down to a respectable 4% since 2006, suggesting that Hungary should be more efficient in implementing cuts than many other indebted nations (Greece, for example, has seen a rash of strikes and riots over proposed pay cuts).

In addition to the lack of a real pressing issue in Hungary, at least for the time being, the fact is that Austria is really not dependent on Hungary in any material way for its trade or businesses. In fact Hungary is not even one of Austria’s top three tradings partners in either exports or imports. Meanwhile, in terms of Hungary’s economy, less than 6.1% of its imports (or exports) are from (or go to) Austria. So one has to wonder if the Austria ETF has been unfairly punished as a proxy for Hungary due to the historically close social and cultural ties between the countries. Although Austria does minimal business with Hungary and although the budget situation is not nearly as bad as was originally thought, EWO has sunk precipitously over the past week, shedding more than 9%. Once cooler heads prevail, look for investors to realize that EWO has been oversold in light of the Hungarian “crisis,” a revelation that could help to boost prices in the short-term (see Hungarian Exposure Weighs On Eastern Europe ETFs).

Austria ETF In Focus

EWO tracks the MSCI Austria Investable Market Index, a benchmark that measures the performance of the Austrian equity market. The fund is heavily weighted towards financials, which make up about 40% of the total assets, followed by industrial materials (20.7%) and energy (10.4%). In terms of market capitalization levels, EWO has its main focus on medium cap securities, which make up 52% of the fund, followed by large caps at 31%. EWO pays a robust dividend yield of close to 4% and charges an expense ratio of 52 basis points. For investors who believe that the Hungarian crisis is overblown, at least in the short-term, EWO may make for an interesting contrarian play (see more EWO fundamentals here).

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Disclosure: No positions at time of writing.