Investors should look to international markets like Eurozone equities and region-specific ETF to track more attractive opportunities for growth.
“The region is Europe, where we have been arguing for some months that a combination of an improved macro environment, positive earnings growth, and still cheap valuations make this swathe of developed markets relatively attractive,” Robert Bush, ETF Strategist for Deutsche Asset Management, said in a research note.
European markets are enjoying a number of supporting factors that could help maintain its current momentum. For instance, the economic outlook remains solid, consumer sentiment is improving, the Purchasing Manager Index reveals a strengthening economy, a potentially weakening euro currency will bolster exporters and the region looks relatively inexpensive.
As many look to European markets for potential opportunities, investors should consider foreign exchange risks or the negative effects associated with fluctuating foreign currencies.
The U.S. dollar is expected to strengthen on a number of factors. For instance, the U.S. index of business conditions rose to a three-year high, adding to the improving U.S. economic outlook. Furthermore, Federal Reserve Chair Janet Yellen reaffirmed the central bank’s commitment to hiking rates, despite disappointing inflation results. Deutsche Asset Management projects that the euro currency could weaken to an average $1.10 in the year ahead, compared to its current price of around $1.19.
“Our view, over the next couple of months, the euro won’t continue its strong appreciation but begin to slow down,” Abby Woodham, ETF Strategist for Deutsche Asset Management, told ETF Trends in a call. “This is good for the Eurozone, especially German exporters.”
Consequently, investors who are seeking Eurozone market exposure may look to currency hedged ETFs, which may outperform non-hedged funds as the USD strengthened.
Investors who believe the euro currency could weaken after its recent rally and are bullish on the broader Eurozone can turn to the Deutsche X-trackers MSCI EMU Hedged Equity ETF (NYSEArca: DBEZ) for broad Europe exposure or something like the Deutsche X-trackers MSCI Germany Hedged Equity Fund (NYSEArca: DBGR) for targeted country exposure.
As Deutsche Asset Management has pointed out, these Europe-related ETFs are attractively priced relative to U.S. markets. DBEZ shows a 14.9 price-to-earnings ratio and a 1.7 price-to-book while DBGR trades at a 14.0 P/E and 1.7 P/B. In contrast, the S&P 500 is hovering around a 19.9 P/E and a 2.8 P/B.
Related: Euro ETFs Continue Defying Skeptics
DBEZ includes a hefty 30.2% tilt toward Germany, followed by 29.4% France, 10.9% Netherlands, 9.9% Spain and 8.2% Italy.
Furthermore, The weakening euro currency outlook should benefit the region’s exporters, especially Germany, the largest member country of the euro-bloc. According to FactSet data, just 23.4% of its revenue is derived domestically, and the largest sector of German markets is consumer discretionary, which includes major automobile makers like BMW, Daimler and Volkswagen.
For more information on hedged options, visit our currency hedged ETFs category.