A funny thing happened on the way to the European credit crisis. Specifically, investors appear to accept the monetary union’s commitment to the euro. In turn, more folks are venturing back into European equities. According to data provided by Merrill Lynch, stock mutual funds and exchange-traded funds dedicated to Europe just set a record with 20 consecutive weeks of inflow. The enormous amount of cash pouring into these funds forces money managers to increase their buying activity.
The increase in trading volume is not only evident in the inflow data, but by the shares that European exchanges have reported as well. The current estimate for 2013 is that trading volume for European equities rose by roughly 20% year-over-year. Moreover, record levels of trading are being registered by institutional investors in “dark pools” — venues that do not display prices so that participants can place orders anonymously.
What does it all add up to? Institutional and retail investors are rediscovering an appetite for European stocks. ETF enthusiasts may want to investigate the technically strong uptrends in regional stalwarts like iShares S&P Europe 350 (IEV) and iShares MSCI European Monetary Union (EZU).
3. Economic Stimulus
The Federal Reserve may delay a tapering increment and “talk up” current levels of monetary policy accommodation, but it is unlikely to reverse course by increasing the monthly money printing. Meanwhile, the U.S. Congress has no appetite for passing any form of fiscal stimulus in 2014. In brief, the U.S. economy is closer to having to sink or swim on its own.
In contrast, the European Central Bank (ECB) is in an earlier stage of providing stimulus and recently cut its benchmark lending rate. The ECB may even emboldened by the perceived success of the Fed’s zero-interest-rate policy. Considering the extent of the remarkable rallies in U.S. and Japanese stocks — taking into account that the bulk of the gains are primarily attributable to monetary stimulus efforts — foreign developed stocks in Europe and Asia may be in the 2014 the driver’s seat.
By the same token, both the euro and the yen should feel the dollar’s heat, especially if the U.S. stays on its tapering course at the same time that Japan and Europe ratchet up their easing. ETF investors would benefit by hedging the currency exposure with WisdomTree Hedged Europe (HEDJ), WisdomTree Hedged Germany (DXGE) or Wisdom Tree Hedged Japan Equity (DXJ).