Now May Be the Time to Explore European Equities
What’s the potential impact of a weakening euro?
It’s important to consider the possible impact that a further potential weakening of the euro could have on U.S. dollar-based investments in the region.
Exchange traded funds, such as the iShares Currency Hedged MSCI Germany ETF (HEWG) and the iShares Currency Hedged MSCI EMU ETF (HEZU), can provide access to the German and eurozone markets, respectively, while potentially mitigating exposure to fluctuations between the value of the euro and the U.S. dollar.
Market Realist:
European equities continue to look good, with macroeconomic indicators spelling recovery and equities continuing to be cheaper than their US (SPY) counterparts.
We have established that despite the Hellenic saga weighing on market sentiment, European equities are likely to do well in the long term. With the ECB’s (European Central Bank) QE (quantitative easing) buoying markets and falling oil prices (BNO) benefiting consumers, European equities are likely to do well if Greece doesn’t play spoilsport.
Meanwhile, you should ensure that you hedge your European exposure. The euro has been weakening against the dollar for the past year, as you can see in the above graph. With the Greece debt crisis still looming large, the euro might take a further tumble in the coming weeks. Many analysts are predicting euro–dollar parity by the end of the year. In such a scenario, it makes sense to protect yourself against currency fluctuations.
The previous graph shows the total returns of the iShares MSCI EMU ETF (EZU), the iShares MSCI Germany ETF, the iShares Currency Hedged MSCI EMU ETF (HEZU), and the iShares Currency Hedged MSCI Germany ETF (HEWG). EWG and EZU are giving YTD (year-to-date) returns of 8% and 9%, respectively, while their currency-hedged counterparts HEWG and HEZU are giving YTD returns of ~14% and 16%.
All in all, with the Greek referendum looming large, the possibility of Grexit is as real as ever. Financial markets are likely to stay volatile until Greece’s fate is decided once and for all. Investors need to keep track of any new developments coming out of the area, as no one can really predict the fallout from Grexit, although markets are already swinging lower to factor in the possibility.
Though economic indicators seem to indicate a positive outlook for European equities in the long term, investors need to be prepared for an extremely volatile week in international markets. A wait and watch approach would be prudent for now.