The iShares MSCI Belgium Capped ETF (NYSEARCA:EWK), based on the shares of Belgian companies, ranks extremely high in the ETF World Matrix with Cash list, edited by investment company Dorsey Wright. To gauge whether this extremely interesting ETF's ranking is justified, it's worth looking at what exactly the situation in the Belgium economy is like.
First, we should explain how the ranking is done. Dorsey Wright compares selected ETFs with each other (one each for each). There are 34 ETFs that are ranked. The main factor is relative strength of each fund. Relative strength tells us how much the price of the company (or of the fund) grows in comparison to other companies (funds). The relative strength indicator, in conjunction with fundamental analysis is quite effective. Why? On the stock exchange, there is a principle of inertia: a company (or fund) that is growing strongly is hard to stop.
Below, you can see top of the World ETF Matrix with Cash ranking order. EWK is in third position. The Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RSP) is ranked first and the iShares Dow Jones U.S. ETF (NYSEARCA:IYY) is second.
Source: Dorsey Wright
So, let's take a glance at the fundamental situation in Belgium.
The Political Situation
The political situation in Belgium is now stable. Charles Michel has been at the helm of the government since 11th October, 2014.
The Kingdom of Belgium is a federal parliamentary democracy under a constitutional monarchy. It is divided into 3 regions: Brussels - the Capital Region, the Flemish Region and the Walloon Region. Since 1993, there are three levels of government (federal, regional, and linguistic community). In 2012, the sixth state reform transferred additional competencies from the federal state to the regions and linguistic communities.
It is worth recalling that a few years ago, Belgium was without a viable government due to a political deadlock between the Flemish and Walloons. This political crisis had paralyzed the country's political apparatus from June 2010 till December 2011 (for 589 days, Belgium was without a federal government). In this period, the 20 biggest companies index, BEL20, went down 23%, and the 10-year bond yield went up from 3,097 to 5,910 (91%).
Euronext Brussels BEL20 Index (BEL20) vs. BELGIUM 10-Year Bond Yield (10BEY.B)
The European Parliament is based in Brussels. For this reason, the city is often witness to protests.
Economy and Finances
Belgium is a small but highly urbanized and industrialized country. Poor in natural resources, it imports raw materials in great quantity and processes them largely for export. Exports account for around two-thirds of Belgium's GDP. Almost 75% of its foreign trade is with other European Union countries, so the country is highly exposed to business tendencies in the EU.
Belgium is the world's most congested country, with drivers losing 51 hours a year, on average, to traffic jams (in Brussels, 74 hours). The cost of traffic jams in Belgium is 10.58 euros per hour, according to Leuven transport researcher Sven Maerivoet. Efficient mobility is a big problem for society of Belgium, and traffic jams are causing real harm to the economy.
From Q2 2013, Belgium's GDP growth rate is stable, but rather poor (0-0.5%). In Q2 2015, the country's economy expanded 0.4% over the previous quarter. The indicator almost perfectly reproduces what is happening in the EU economy (please look at the chart below). The unemployment rate is projected to decrease from a ten-year high of 8.5% last year to 8.1% in 2016 as job creation in the private sector picks up - according to European Commission data. We can name it a "slow-moving recovery".
GDP growth rate: Belgium vs. the EU
Source: Trading Economics
What are the weaknesses of Belgium' economy according to the European Commission's "Country Report Belgium 2015"?
- Chronic underutilisation of labour, with a low aggregate employment rate
- A high overall tax burden
- Competition in several key service sectors remains low
One of the most interesting facts about Belgium's labour market is presented at the chart below. Labour costs in the country are indirectly linked to productivity developments.
Productivity and Wage Evolution (2009 = 100)
It is no wonder that Belgium falls lower and lower on the index of economic freedom.
Belgium - Index of Economic Freedom in 2015, Score: 68.8 (100 represents the maximum freedom)
What is worrying is that the country's ability to make future payments on its debt is decreasing. Government debt as a percent of GDP (106.50% in 2014) is skyrocketing from 2008 and is higher than the EU average (92%). But what's interesting is, it's still below Belgium's average level from years 1980-2014 (108.96%).
Government Debt-to-GDP: Belgium vs. the EU
Source: Trading Economics
Public finances in Belgium are in a condition that is characteristic of those in almost all EU countries: poor, but stable. The country can only dream of having a budgetary surplus.
We need to put a question mark on the 2015 budget. The Federal state budget deficit plan for 2015 was 8.50 bln EUR. As the end of July, it was 8.33 bln EUR. Yes, the budget deficit is seasonal (tax revenues are notably higher in the second half of the year than in the first half), but it seems that the first half of the year was a bit too wasteful.
We should remember also that foreign investors own a majority of Belgium's treasury certificates and linear bonds. This dependence makes the country very susceptible to a loss of market confidence.
And what about ratings?
- Fitch Ratings: Rating AA affirmed, outlook negative (24/07/2015)
- S&P: Rating AA affirmed, outlook stable (17/07/2015)
- Moody's: Rating Aa3 affirmed, outlook changed from negative to stable (07/03/2014)
- DBRS: Rating AA (high) confirmed, stable trend (13/03/2015)
- Japanese Credit Rating Agency: Rating AAA affirmed, outlook stable (01/07/2014)
- Rating and Investment Information, Inc.: Rating AA+ affirmed, outlook stable (31/08/2015)
The Banking Sector
In the years 2008-11, Belgium was struggling with a banking sector crisis, which revealed the incompetence of EU regulators and ratings agencies. In October 2011, the country nationalized big bank Dexia (OTC:DXBGF), which had passed stress tests year earlier.
What's the situation right now? KBC Bank (OTCPK:KBCSF) has repaid 7 bln EUR of federal loans, and it's in good condition. Dexia is not an active bank. Fortis was rebranded as Ageas (OTC:AGESF), and is now an insurer (without toxic assets).
What is interesting is that in the next three years, a great consolidation is expected in the Belgian banking sector - according to Ernst & Young's "European Banking Barometer - 2015" presentation. According to the same report, Belgian bankers expect stabilization in the economy and in the banking market.
The Real Estate Market
If we look at the chart below, the bubble appears to be growing...
... but property price levels remain moderate compared to those in other EU member states.
Average price/m² of a 120 m² apartment located in the capital (in EUR)
(BE - Belgium)
Source: Global Property Guide
Remember, of course, that in the charts above, we see the effects of extreme easing of monetary conditions in EU.
The political situation in Belgium is stable. The economy is in a slow recovery. Federal state finances are not in good shape, but where are they so (speaking about the EU)? The banking sector is recovering. Belgium does not stand out like on the plus side, but there are no serious threats for this country either.
The investment mood has been very good, despite China's fundamental problems. In fact, there are a few good reasons to invest in European equities. For example, quantitative easing provides support to consumption and money supply in the eurozone. Result? Better growth.
Those who are already invested in the European and Belgian markets could patiently wait for further developments. For investors who like medium amounts of risk, invest in ETFs with exposure to Belgium.
How to invest in the country
There are some ETFs with exposure to stocks listed in Belgium. EWK has the largest exposure.
5 ETFs with the largest exposure to Belgium
And here we have the most economical solutions:
5 cheapest ETFs with exposure to Belgium
You may ask: Where is EWK in this ranking? Well, it's in the 11th position, with ER = 0.47%. Not so bad.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.