When Australians think of Europe, it is more likely to be as a tourist destination, or as a source of never-ending negative economic and political headlines.

It’s been almost a decade since the Greek debt crisis emerged as a potential threat to the stability of the Eurozone, and since then investors have been battered by gloomy headlines about bailouts, tottering banks, the rise of ‘populist’ political movements, and the actual vote by a member nation of the European Union (EU) to opt out – and a major one at that.

Coming into this year, the prospect of elections in the Netherlands, France and Germany further unnerved investors. The French election, which will be completed this coming weekend, still does.

Many of those long-running problems still exist: Greece, for example, has more than 7 billion euros ($10.2 billion) in bond payments due in July, and very few people expect it to meet those. Greece has not done what its creditors wanted in terms of reforming its energy and labour markets and cutting pension payments.

Greece still spends 13.3% of its gross domestic product (GDP) on old-age pensions, by far the largest proportion in the EU (Germany spends about 8.5% of GDP; the lowest, Ireland, spends 4.9% of GDP.) The country’s economy unexpectedly contracted in the final quarter of 2016, and the unemployment rate rose again. Few believe that a further bailout won’t be needed.

The European Central Bank (ECB) is committed to ending quantitative easing (QE) by ceasing its 2.3 trillion-euro ($3.3 trillion) bond-buying program. How this will affect the weaker economies in Italy, Portugal, and Spain is unknown.

But behind the headlines, the economic story in the 19-member Eurozone is strong. Eurozone growth in the fourth quarter of last year was estimated at 0.5%, faster than the US rate. For 2016 as a whole, growth in the Eurozone outpaced that in the US, by 1.7% to 1%.

In March, the ECB raised its economic growth forecast for the Eurozone this year to 1.8% from 1.7% previously. And that may be too conservative: in April, the forward-looking IHS Markit’s Flash Composite Purchasing Managers’ Index, considered a good pointer to growth, climbed to 56.7 from March’s 56.4, its highest reading since April 2011. IHS Markit said the latest PMI data, if maintained, pointed to second-quarter economic growth of 0.7%.

The outlook for corporate earnings reflects this, with earnings for the pan-European Euro STOXX 600 index – which represents a basket of stocks across 17 European countries – expected to rise by 17% in the first quarter. The figure is now outpacing US earnings expectations for the first time in 18 months.

At the same time, according to a Bank of America Merrill Lynch investor survey conducted in March, a net 23% of global fund managers believe European stocks are under-valued, compared to 81% who think US equities are too expensive – the largest difference in valuation views in more than 20 years.

A report from French investment bank Société Générale in March summed up the bullish case for Europe. Titled All Good Things Point to Europe, the report noted that Eurozone shares were trading at a 47% discount to their US counterparts. Moreover, the report said all sectors in the Eurozone market were trading at a significant discount to their US peers: from 26% for the healthcare sector to 60% for consumer discretionary.

And on top of the valuation gap, the report pointed out that the euro had fallen by 33% versus the US dollar over the last decade. “As a consequence, Eurozone companies appear particularly attractive to non-euro-listed companies, particularly US companies,” said SocGen.

While US stocks led the reflation rally that began in November, investors concerned that US stocks are over-valued are moving into cheaper European stocks. But while the US market indices are at record highs, the Euro STOXX 600 – which is up 24% since February 2016 – remains more than 6% below its April 2015 peak. Strategists see the advance picking up momentum after the French election concludes, especially if pro-EU centrist Emmanuel Macron defeats National Front candidate Marine Le Pen at the weekend.

The upshot is that money is flowing into European stock markets. According to EPFR Global data, in the week to April 26, European equity funds racked up their strongest inflows since December 2015, with inflows of US$2.4 billion ($3.2 billion).

For Australian investors, the European recovery is a chance to broaden their international diversification – which should be a prime concern at all times.

One of the simplest ways to participate in the European markets is through some of the exchange-traded funds (ETFs) that are listed on the Australian Securities Exchange (ASX). Like all ETFs, these vehicles give you the return from a market index – meaning they will hold the poor performers as well as the good – but they offer investors a broad exposure in a cheap vehicle, which can be established in one trade.

There are also a range of unlisted actively managed funds that offer European exposure; and it is also very easy to buy individual European stocks – these approaches can certainly be used to try to pick up some out-performance, but the ETFs offer a broad exposure, to start with.

This means that the ETFs pick up on several sectors that are under-represented in the Australian share market, for example, pharmaceuticals; and access to global revenue streams – particularly from emerging markets – from global multi-nationals with market-leading brands and competitive advantages.

ASX-listed ETFs are mostly uunhedged, meaning that investors take A$ currency risk: the ETFs perform better when the A$ weakens against US$ and the Euro. While this is usually described as currency ‘risk,’ many Australian investors actually like to have some diversification out of the A$.

ANZ ETFS Euro STOXX 50 ETF (ASX code: ESTX)

ESTX is up 6.1% so far in April in A$ terms, slightly behind its benchmark on 6.17%: both are up 9.1% year-to-date. With an inception date of July 2016, ESTX does not have a one-year performance figure yet.

Management Fee: 0.35% pa. 

ESTX focuses on the Eurozone’s large-cap stocks – it tracks Europe’s main blue-chip index, the Euro STOXX 50 Index, which contains 50 of the largest stocks from 12 countries within the Eurozone. (It does not include UK-based companies). Many of these are not really European stocks, in the same way that the Dow Jones Industrial Average heavyweights are not really US stocks – they are global mega-caps that happen, because of their history, to be headquartered in Europe.

This blue-chip focus distinguishes ESTX from the other Europe-focused ETFs on the ASX, which are more broadly based. ESTX gives investors access to global household names like L’Oréal, Louis Vuitton Moët Hennessy (LVMH)

Siemens, Daimler, BNP Paribas, Unilever, Airbus, Philips and Nokia. Managed for 0.35% a year, ESTX is unhedged.

Top 10 holdings:

• Total (Energy)
• Siemens (Conglomerate)
• Sanofi (Pharmaceutical)
• SAP (Software)
• Bayer (Pharma/Chemical)
• Banco Santander (Financial)
• BASF (Chemical)
• Allianz (Financial)
• Anheuser-Busch InBev (Brewing)
• Unilever (Consumer Goods)

Vanguard FTSE Europe Shares ETF (VEQ)

One-year Total to 31 March: 10.67% versus 10.51% (Vanguard)

Performance since inception (9 December 2015): 0.55% a year, versus benchmark 0.69% a year.

Management fee: 0.35% a year

The Vanguard FTSE Europe Shares seeks to track the return of the FTSE Developed Europe All Cap Index (with net dividends reinvested) in Australian dollars, before fees, expenses and tax.

The ETF provides low-cost, broad exposure to major European stock markets. VEQ is unhedged.

Top 10 holdings:

• Nestlé (Food)
• Royal Dutch Shell (Energy)
• Roche (Pharmaceutical)
• Novartis (Pharmaceutical)
• HSBC (Financial)
• Unilever (Consumer goods)
• British American Tobacco (Tobacco)
• Total (Energy)
• BP (Energy)
• Siemens (Conglomerate)

iShares Europe ETF (IEU)

One-year Total to 31 March: 10.57% versus 10.91% for index

Five-years: 12.13% a year versus 12.51% a year for index

Since inception (July 2000): 1.28% a year versus 1.66% a year for index

(IEU lost 50% in first 2.5 years, and again in 2007-08)

Management fee: 0.6% a year

The iShares Europe ETF gives an investor exposure to a large range of European companies. The fund tracks the S&P Europe 350 index, and is mainly invested in shares in the United Kingdom, France, Switzerland and Germany. Its heaviest weightings are in financials, consumer staples and healthcare. IEU is unhedged.

Top 10 holdings

• Nestlé (Food)
• Novartis (Pharmaceutical)
• Roche (Pharmaceutical)
• HSBC (Financial)
• Total (Energy)
• British American Tobacco (Tobacco)
• Royal Dutch Shell (Energy)
• BP (Energy)
• Sanofi (Pharmaceutical)
• Siemens (Conglomerate)

BetaShares WisdomTree Europe ETF Currency Hedged (HEUR)

Inception: 10 May 2016

Performance since inception: 24.13% versus benchmark 24.73%

Last six months: 17.89% versus 17.95%

Management fee: 0.58% a year

HEUR is a much different ETF to the iShares, Vanguard and ASX ETFs offerings: it is a “smart beta” ETF, designed to capture the return of a specialised index that is built around particular investment “factors” – in this case, the index (built by US ETF provider WisdomTree) is designed to capture globally competitive dividend-paying European companies.

The index constituents trade in Euros and also generate at least 50% of their revenue outside Europe. The rationale behind investing in these stocks is that they are well placed to benefit from growth in international trade, and the potential ongoing reliance by European economies on exports and currency weakness to sustain economic growth.

Top 10 holdings:

• Telefonica (Telecommunications)
• Siemens (Conglomerate)
• Banco Bilbao Vizcaya Argentaria (Financial)
• Banco Santander (Financial)
• Daimler (Automobiles)
• Anheuser-Busch InBev (Brewing)
• Sanofi (Pharmaceutical)
• Unilever (Consumer staples)
• Bayer (Pharma/Chemical)
• LVMH (Luxury goods)

By weighting stocks according to dividends, moreover, the HEUR ETF also biases the exposure toward companies with the potential to produce sustainable profits, and which are focused on shareholder value.

The other major difference is that HEUR is currency hedged: this reduces currency risk from the fluctuations of the Euro against the A$. And the bonus is that while European overnight inter-bank interest rates are negative – as they are at present – the currency hedging also takes advantage of the relative difference between European interest rates and those of Australia: in effect being paid to borrow Euros and then using these borrowings to buy Australian dollars, which earn a higher interest rate return.

UBS IQ MSCI Europe Ethical ETF (UBE)

Inception: 18 February 2015

Performance last 12 months: 4.46% versus benchmark 4.22%

Performance since inception: –1.8% a year versus –1.65% a year

Management cost: 0.4% a year

UBE also provides a diversified core exposure across European shares markets, but also has an ethical investment bias: it excludes companies with significant business activities involving tobacco and those engaged in the production of cluster bombs, landmines, chemical and biological weapons and depleted uranium weapons.

It is still a very broad exposure: the index that UBE tracks, the MSCI Europe ex-Tobacco ex-Controversial Weapons Index captures the large and mid-cap representation across 15 developed markets countries in Europe. With about 430 constituents, the index covers about 85% of the free float-adjusted market capitalisation across the European developed markets equity universe. UBE is unhedged.

Top 10 holdings:

• Nestlé (Food)
• Roche (Pharmaceutical)
• Novartis (Pharmaceutical)
• HSBC (Financials)
• Royal Dutch Shell ‘A’ (Energy)
• Total (Energy)
• BP (Energy)
• Sanofi (Pharmaceutical)
• Siemens (Conglomerate)
• Royal Dutch Shell ‘B’ (Energy)

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.