European stocks and the corresponding exchange traded funds have, for much of 2016, been disappointments, but some market observers believe with the euro poised to weaken and the dollar gaining momentum, European equities could deliver for investors next year.
According to JPMorgan Asset Management, the European stock market has gotten too cheap to resist, with valuations on the MSCI Europe ex-UK Index and the FTSE All-Shares Index at attractive valuations when their price-to-earnings ratios are adjusted for inflation over the past 10 years, reports Aleksandra Gjorgievska for Bloomberg.
Related: Brexit Opens Opportunity for Europe ETFs
ETFs such as the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ) and the iShares MSCI EMU ETF (NYSEArca: EZU), which is not currency hedged, have been hindered by a surprisingly strong euro, but that is a scenario that could change as well.
The European Central Bank (ECB) has been an issue for investors this year, but the ECB recently noted it will not taper its quantitative easing program, at least not in the near-term. Market observers argued that the ECB could even extend its bond purchasing program to further support inflation. The ECB has already spent over a trillion euros buying government bonds, cut its benchmark rate to zero and adopted a negative deposit rate.
SEE MORE: Look to Currency Hedged ETFs as the Euro Continues to Weaken
“While European ETFs may not have outperformed some of the funds tracking Latin American markets, trading European funds against the U.S. could be successful going into 2017. He cited a trade like getting long the German DAX index and short the Dow,” Boris Schlossberg, managing director of foreign exchange strategy for BK Asset Management told CNBC.
[related_stories]Many traders are increasing bets that the U.S. Federal Reserve could hike interest rates in December, further strengthening the U.S. dollar against the euro currency. Consequently, investors who expect in an improving Eurozone economy, along with a depreciating euro currency, should consider currency-hedged ETF options to gain exposure to the region.
For instance, the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ), iShares Currency Hedged MSCI EMU ETF (NYSEArca: HEZU) and the aforemetioned HEDJ target Eurozone countries but try to diminish the negative effects of a depreciating EUR – a weakening foreign currency would normally reduce returns on overseas securities when converted back into a stronger U.S. dollar.
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