Hedging currency exposure has been a saving grace. The euro had an uneven ride last year and most did not anticipate this year to bring much respite. Frail growth, credit transaction and a very real threat of a deflationary spiral are igniting mounting expectations of a quantitative easing.
Economic despair have only been added to by escalating political risks: the possibility that, led by a far-left party Syriza, Greece will soon be exiting the Eurozone that will provide comfort to populist parties elsewhere.
Despite the poor backdrop, many in the investment industry still predominantly remain upbeat, suggesting that Europe is home to many successful businesses with global earnings and prices appear relatively enticing by historical standards should traders at long-term valuation measures. Furthermore, European companies that generate most of the revenues outside of the region are really benefitting from a strong dollar with the falling oil prices and the healthy U.S. consumer are both acting as support.
Taking the long view
The first thing to consider is that anyone who is investing in the Eurozone should have working knowledge to take longer view than just 2015. The ECB’s decision on whether to take on QE will have a binary result for the markets in the short term. Should this happen, the market should react positively and vice versa if not.
With this in mind, the funds that are focused on the firms that do well in prevailing conditions are one good option and investors are looking for exposure of additional economic and stock analysis. For several investment groups, the last few years gave investors the required knowledge that there is no money to be made after a massive central bank stimulus programmes superseded the current equities.
Cautioning depreciation
It is imperative to recall the flipside that must hedge the currency exposure – the euro is presently sliding against other benchmark currencies in anticipation of QE.
Moreover, as the year presses forward, it’s very possible that there is a real difference between the central banks walking away from printing money and the ECB which although walking very much towards it, the upshot is that many asset allocators are minded to follow the flow of new capital from central banks.
Instead of other countries with more robust economic fundamentals, Japan is something of a bellwether and this approach has worked well over the past few years. That being said, the fund management industry has been very much trance in terms of the mark when it comes to offering currency hedge versions of their European equity funds.
Not all about winning
Another way to approach European markets this year is to move past the mindset of winning and losing sectors. An area of possible surprise might possibly be corporate renewal. Business that are making considerable modifications in order to unlock latent value for share holders are present across the market.
The greatest scope is that among the larger groups with diverse business portfolios or a broad geographical spread that appears to bring narrowed focus. Firms that are presently include to name a few Bayer, GlaxoSmithKline, Akzo Nobel and Siemens. The level of change is very intricate but the benefits could be very well enduring and material.