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Overview and Rationale:
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 EWO have benefited more from Europe's opening to the east more than any of the other older EU members.

First, the Economist points out that Austria's 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 10% of Austria's GDP.

Furthermore, while a decade ago much of its investment was concentrated on manufacturing, now the biggest chunk goes on 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 have boosted economic growth as well as the ETF (EWO) that tracks it.

That is, until last fall when EWO began a sharp decline as the economies of Eastern Europe slowed exposing fiscal weakness and fragile currencies.

Catalyst:
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.

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

Risk Factor & Risk Management:
Moderate to high due to heavy emerging market debt of Austrian banks. Pleas keep in mind that the top three companies in EWO (Erste Bank, OMV and Telekom Austria) account for 39% of its assets. Suggest an 8% trailing stop loss.

Source: ETF Pick of the Week: iShares MSCI Austria