When evaluating European equities, advisors and investors should consider the advantages of hedged euro approach, which can help diminish risks associated with the common currency.
On the recent webcast, European Growth with Currency Protection ETF, Luke Oliver, Head of Capital Markets and Passive Investments at Deutsche Asset and Wealth management, Dodd Kittsley, Head of ETF National Accounts & Strategy at Deutsche Asset and Wealth Management, and Scott Kubie, Chief Investment Strategist at CLS Investments, discussed the opportunities in the Eurozone economy and how a fluctuating euro currency can affect returns.
“Historic trends in the U.S. Dollar can tell a clear story of currency fluctuation and cyclical trends,” Oliver said. “Each currency changes according to its own set of factors and cycles.”
With the European Central Bank adhering to a loose monetary policy, the euro currency is more at risk of depreciating against the U.S. dollar. Consequently, investors who are bullish on the Eurozone economy may be up against a bearish euro currency outlook – foreign investment returns are usually denominated in their local currency, so a weakening euro currency translates to lower U.S. dollar-denominated returns.
In the U.S., the Federal Reserve is more likely to hike rates before the ECB, potentially strengthening the U.S. dollar against a basket of foreign currencies.
Oliver points out that since 1968, the average U.S. dollar peak and trough appears approximately every eight years. The current cycle is in its 12th year, with the U.S. Dollar Index near all-time lows.
Meanwhile, European equities are looking attractive relative to U.S. stocks. The MSCI Europe Index shows cheaper valuations based on the price-to-earnings and book-to-price ratios. [Guard Against Euro Volatility With This ETF]