As HEDJ, the WisdomTree Europe Hedged Equity Fund recently crossed $15 billion in assets, we’ve been particularly interested to see how global exporters within Europe have been responding to a weaker euro.
Recap of Where the Euro Moved in 2014 and Where It Has Been Heading in 20151
• The euro ended 2013 at $1.37 and didn’t move much in the first half of the year, ending the first quarter at $1.38 and the second quarter at $1.37.
• The second half of the year was a different story, with the euro ending the third quarter at $1.26 and then finishing 2014 at $1.21.
• As of March 13, 2015, the euro was below $1.05.
Matching Our Intuition to Real-World Results
One large holding in the WisdomTree Europe Hedged Equity Index (the Index HEDJ is designed to track) is Sanofi. As of December 31, 2014, it represented a 4.40% weight in the Index, making it the fifth largest holding overall.2 Sanofi’s February 5, 2015, earnings report provides the perfect example of how European exporters have been responding to a weaker euro. Intuitively, we’d expect that Sanofi’s results would show the stronger euro as a headwind, having appreciated in a fairly steady trend since the summer of 2012 when it hit a low of $1.213. The critical question—did the fourth quarter of 2014, when the euro was substantially weakened, look any different from the first three quarters of 2014?
Sanofi’s Fourth-Quarter Results Indicate Emergence of a Euro Tailwind
• Quantifying the Euro Tailwind: While the overall impact of the euro on Sanofi’s net sales was negative when taking the full year into account, we call attention to the fact that the fourth quarter saw a positive currency impact of nearly a quarter of a billion euros. Similarly, the impact on business earnings per share was about 0.02 euros 4.
• Sanofi’s Thoughts on 2015: Within its company presentation, Sanofi said that if December 31, 2014, exchange rates were applied to its 2015 forecasts, business earnings per share could potentially increase 4% to 5%. Of course, this is an estimate and by no means certain, but it’s worth noting that the December 31, 2014, euro exchange rate was $1.21, whereas the exchange rate on February 5, 2015—the day these results were released—was $1.15.5 With Mario Draghi’s January 22, 2015, announcement that the European Central Bank would embark on quantitative easing, the case for a strengthening euro has become more difficult to make, so it’s possible that Sanofi’s first-quarter 2015 results could reflect an even lower euro exchange rate.