Buys and Sells in the Lowlands

07/16/2007 12:00 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of the Chartwell Advisor Global ETF Report, gives thumbs up to the fund of one Benelux country but thumbs down to another.

The iShares MSCI Netherlands index (AMEX: EWN) is often overlooked by global ETF investors despite its consistent performance and high-quality multinationals. In the Dutch golden age during the 17th century, Dutch trading, science, and art dominated the world. It still packs a global punch above its 1.4% weighting in the MSCI World index. Even better, The Netherlands stock market is undervalued with its AEX index trading at 11x earnings.

About twice the size of New Jersey with a population of 16.5 million, the Kingdom of the
Netherlands is a prosperous and open economy with a bent towards trading. The top multinationals based in the Netherlands accounted for combined revenue of just under $900 billion of revenue in 2006.

It is easy to tap into this global corporate vigor through EWN, which contains a basket of 27 Dutch companies. The global financial services firm ING accounts for 18% of the [weighting]. 50% of its profits come from insurance operations, and since European and American markets are rather mature, its strategy is to continue to diversify geographically and move into higher growth areas such as retirement services.

The next four highest weighted companies in this ETF are all top quality: ABN Amro, Philips Electronics, Unilever, and Aegon. Diversified financials account for 18% of the basket; food, beverage, and tobacco is 13%; banks, 13%, and consumer durables 10%. (The ETFs closed above $32 Friday—Editor.)

Belgium sits at the crossroads of Europe and is home to both NATO and the European Union. The iShares MSCI Belgium index (AMEX: EWK) contains 23 companies with the insurance and banking behemoth Fortis leading the way with 23% of the basket.

Financials and banks make up more than 50% of the holdings of the Belgium ETF with materials, food and telecom companies adding 22%. We noticed early this year that the Belgium stock market was undervalued, trading at 1.9x book value, with a forward price/earnings ratio of 12x. It enjoyed low interest rates and according to data from, global money managers were increasing their Belgium weightings.

Based on this, we added EWK to a couple of our portfolios and enjoyed nice returns. Last month, noting the rather high valuation of the overall Belgium market, which is now trading at 45x earnings, we sold our EWK allocations.

EWK was down 5% during the week after the elections despite the [choice] of the centre-right Flemish Christian Democrats to lead the next government after eight years of dominance by the Liberal Party. Near term, the election may cause a bit of turmoil since Flanders, with 60% of the population, wants more autonomy and clout. Once valuations come down and expected economic reforms are initiated, it may be time to take another look at this small country that packs a punch way above its weight in global finance. (EWK closed at $28.45 Friday—Editor.)

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