Strategically Located—and Cheap

01/28/2009 11:03 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of Chartwell Advisor Global ETF Report, thinks pessimism about Austria is way overdone.

The eight million people of Austria are at the heart of the European continent, and the country’s resurgence brings back memories of its historical role as an imperial dealmaker.

Vienna still has the regal feel of an imperial capital, much grander than its current size and stature, but the country benefits economically and politically by not being France or Germany, countries that tend to throw their weight around the councils of Europe.

For several reasons, Austria and its exchange traded fund have benefited from Europe's opening to the east more than any of the other older European Union members. First, the Economist points out that its trade with central and eastern Europe (CEE) has jumped over the past decade and a half, helping reduce its trade deficit. Second, and more important, Austria's stock of direct investment in CEE zoomed from almost zero in the early 1990s to nearly 10% of Austria's GDP.

Furthermore, while a decade ago much of its investment was concentrated on manufacturing, now the biggest chunk goes to financial intermediation, property, and services. This reflects its growing role as the nexus of support services for Eastern European countries.

The eastern opening, together with those of Austria's EU entry in 1995 [and] EU economic and monetary union in 1999, have boosted economic growth as well as the ETF, iShares MSCI Austria (Amex: EWO), that tracks it—until last fall, when EWO began a sharp decline as the economies of Eastern Europe slowed, exposing fiscal weakness and fragile currencies.

The chief catalyst that I believe will propel EWO is its relative valuation and the likelihood that markets and economies of Eastern Europe are at a point of maximum pessimism.

We are likely close to a point of extreme pessimism for EWO with minimal down side risk and the potential for improving prospects. The Austrian market is trading at just 5.5x projected 2009 earnings, compared with 11.2x for Germany and 12.8x for Switzerland. It is down about 20% over the last three months, but is showing some near-term strength.

The risk is moderate, though the top three companies in EWO—Erste Bank (Vienna: EBS.VI), OMV (Frankfort: OMV.F), and Telekom Austria (NYSE: TKA)—account for 39% of its assets. We suggest an 8% trailing stop loss. (The ETF closed at $11.73 Tuesday—Editor.)

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