Wiener Schnitzel and Shamrocks

12/12/2007 12:00 am EST

Focus: GLOBAL

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of Chartwell Advisor Global ETF Report, says stellar performers Austria and Ireland have hit rough patches recently, making those strong markets look cheap.

The lack of confidence in global financial markets is reflected in the pricing of some markets that have many admirable characteristics. I have not seen such valuations for these quality markets since starting [this newsletter] in 2003.

Let me touch on two that are currently out of favor with investors: Austria and Ireland.

The Austrian exchange traded fund, iShares MSCI Austria (NYSEArca: EWO) has done rather well over the past few years as the best play on Eastern Europe by serving as a gateway between these fast-growing emerging markets and Western European markets.

The end of the Cold War in 1989 and the recent entry of many of Austria's eastern and southern neighbors into the European Union have put this smallish country of 8 million people back at the heart of the continent and brings back memories of its historical role as an imperial deal maker.

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, which tend to throw their weight around the councils of Europe.

For several reasons, Austria and its exchange traded fund has benefited more from Europe's opening to the east than any of the other older EU members, in several ways.

First, its trade with central and eastern Europe (CEE) has jumped over the past decade and a half, helping to reduce its trade deficit. Second, and more important, Austria's stock of direct investment in central and Eastern Europe zoomed from almost zero in the early 1990s to nearly $28 billion in 2004, equivalent to 8% 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, EU economic and monetary union in 1999 and the entry of ten new EU members in 2004 have all boosted economic growth considerably and buoyed its stock market and the ETF (EWO) that tracks it.

Austria's market is trading at just 12x 2007 earnings, according to data from Reuters, but watch out for the high concentration of its top three companies in its ETF (EWO).

The New Ireland Fund (NYSE: IRL) has also been hit quite hard lately, primarily because over 30% of its holdings are in the banking and construction sector and [there are] concerns about the real estate sector.

Perhaps these concerns are warranted, but they have to be weighed against its valuation.
According to the FT and data from Thomson Datastream and Reuters, it is trading at [around eight times] 2007 earnings—and get this—is the cheapest market in the world.

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