Exchange traded funds tracking European equities started showing signs of rebounding late last year and some market observers believe Europe’s equity markets can remain on course for a comeback this year.
The European Central Bank (ECB) has been an issue for investors, 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.
Many traders are increasing bets that the U.S. Federal Reserve could hike interest rates multiple times this year, 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.
“The Stoxx Europe 600 Index will return 8 percent including dividends by end-2017, boosted by a weak euro, strong global growth and recovered oil prices, according to Christian Mueller-Glissmann, managing director of portfolio strategy and asset allocation at Goldman Sachs in London. The S&P 500 Index will return 4 percent, Goldman predicts, as optimism about economic growth in the U.S. fades and mutes the stock rally. The return forecasts are in local currencies,” according to Bloomberg.
Favorable monetary policies out of the European Central Bank and and improving economic activity across the Eurozone could support Europe currency-hedged exchange traded fund strategies.
Political volatility in Europe, with elections looming in France, Germany and the Netherlands, is a factor investors need to be mindful of.
“Banks are among Goldman’s preferred sectors in Europe this year, as they benefit from a steeper yield curve. Investors can buy bank stocks to hedge their portfolios’ sensitivity to higher rates, Mueller-Glissmann said,” reports Bloomberg.
For more information on the European markets, visit our Europe category.