Centrist and pro-EU Emmanuel Macron’s French presidential election win has helped bolster the euro currency, but some are wary that the initial euphoria could quickly fade. Consequently, as more start to look at Europe-related exchange traded funds, investors should consider the implications of a potential weakening euro currency.
“WisdomTree believes Macron’s star will soon begin to fade and headwinds will commence; investors need to ask themselves if they want to deal with the euro headache right now,” according to a WisdomTree note.
Weighing on the post-election glow, WisdomTree argued that Macron will find that upending the status quo requires a bold legislature, which may pose a problem for the recently strengthening euro currencies.
The EUR now trades at around $1.0866, compared to $1.04 at the start of the year.
“Macron-induced economic revitalization may prove fleeting because it relies on a conciliatory Coalition of the Unwilling: The National Assembly, France’s parliament,” Jeff Weniger, Asset Allocation Strategist for WisdomTree, said in a note. “Macron is about to meet the conflict of his life as he marches headfirst into confrontation with the opposition.”
Euro traders have hopped on the theme of nascent French dynamism spurred by Macron’s tax cuts and government streamlining, but this is all based on the new French president’s proposals passing parliament’s Coalition of the Unwilling.
The new president will also need to set sustainable inflation and economic resilience in the French economy to prompt the European Central Bank to end its €60 billion-per-month bond purchase program. If not, the ECB could continue to maintain its loose monetary policy and keep pressure on the euro currency.
Meanwhile, the diverging monetary policies between the Federal Reserve and ECB may continue to weigh on the EUR as the Fed pushes toward interest rate normalization with higher rates and removing accommodative measures while the ECB may have to taper down its massive bond purchasing program before even thinking about changes to its negative short-term rates.
Consequently, investors who are bullish on European markets and want to gain exposure to overseas opportunities will have to contend with potential currency risks, so it may be prudent to consider a currency-hedged ETF option like the WisdomTree Europe Hedged Equity Fund (NYSEArca: HEDJ).
HEDJ “could alleviate the headache and additional volatility that comes from bearing stock and forex risk at the same time,” Weniger said. “By allowing investors to distance themselves from the euro’s fortunes, WisdomTree allows asset allocators to de-emphasize currency risk and European politics.”
HEDJ tries to reflect the performance of the WisdomTree Europe Hedged Equity Index, which tracks European equities while at the same time neutralizing exposure to fluctuations between the euro and U.S. dollar. Furthermore, the underlying index focuses on dividend paying companies and weights components based on annual cash dividends paid.
For more information on the Eurozone, visit our Europe category.