A big theme of the last six months has been the strength of the U.S. dollar and the weakness of foreign currencies, especially the euro. Thus far this year, the euro has lost 7% of its value versus the U.S. dollar, 15% over the last six months and 18% over the last twelve.1
The euro started trending down as it became increasingly clear that the European Central Bank (ECB) would engage in a more aggressive monetary policy to combat deflationary trends in the eurozone.
Most of the eurozone stocks have been reacting quite well. Out of a universe of 457 stocks trading in euros, we found 444 that displayed a negative correlation over the last 52 weeks—meaning these stocks have reacted positively to the euro depreciation.2 The top 20 are:
Click for current holdings of the WisdomTree DEFA Index and WisdomTree Europe Hedged Equity Index.
What Do These Companies Have in Common? Most Are Exporters.
• The average revenue from within the eurozone for these 20 companies was 32%, and the average revenue from outside the eurozone was 68%. These companies benefit as their foreign sales are translated back to their home currency through a more favorable exchange rate, resulting in higher earnings.
• Most of these companies are seeing their prospects and competitiveness improve against foreign multinationals, especially those incorporated in the United States. As the euro weakens against the dollar, eurozone companies have greater pricing power across the globe compared to their U.S.-based competitors.
An Index to Reflect This Investment Theme
The WisdomTree Europe Hedged Equity Index (WTEHIP) is well positioned to take advantage of this theme that eurozone-domiciled multinational exporters should benefit from a weak euro. WTEHI selects the exporters of Europe, based on a revenue screen, and then neutralizes the impact of currency fluctuations by hedging out the underlying currency exposure of the euro. This allows the Index to benefit from the potential local price appreciation without the negative impact of exchange rate declines that we have witnessed.
A number of companies mentioned in this top 20 list—companies such as Anheuser Busch InBev, L’Oreal, Bayer and Airbus—are among the Index’s top holdings.
The weighted average correlation of the stocks in WTEHI and the euro/dollar exchange rate is -0.42; and while the euro was down 7.4%, the Index was up 13.26%—showing the stocks in aggregate have been responding quite well to the ECB stimulus and the negative correlation.3
As the Federal Reserve starts to tighten its monetary policy, we may be in for a period of relative strength in the U.S. dollar that could persist over a longer cycle. The eurozone stocks with the strongest negative correlation to the euro are a hunting ground for those looking to find stocks that could potentially benefit from dollar strength. But WisdomTree believes it is important to invest in these eurozone companies with a currency hedge in place to protect from the potential falling euro.
1Source: Bloomberg, as of 2/26/15.
2Universe refers to those stocks within the WisdomTree DEFA Index incorporated in the eurozone and traded in euros.
3Sources: WisdomTree, Bloomberg, 12/31/14–2/26/15. Correlation is trailing 52-week.
Important Risks Related to this Article
Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Investments focused in Europe are increasing the impact of events and developments associated with the region, which can adversely affect performance.
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There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, currency, fixed income and alternative investments include additional risks. Please see prospectus for discussion of risks.
Past performance is not indicative of future results. This material contains the opinions of the author, which are subject to change, and should not to be considered or interpreted as a recommendation to participate in any particular trading strategy, or deemed to be an offer or sale of any investment product and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This material should not be relied upon as research or investment advice regarding any security in particular. The user of this information assumes the entire risk of any use made of the information provided herein. Neither WisdomTree nor its affiliates, nor Foreside Fund Services, LLC, or its affiliates provide tax or legal advice. Investors seeking tax or legal advice should consult their tax or legal advisor. Unless expressly stated otherwise the opinions, interpretations or findings expressed herein do not necessarily represent the views of WisdomTree or any of its affiliates.
Jonathan Steinberg, Luciano Siracusano III, Jeremy Schwartz, David Abner, Rick Harper, Sean Kelly, Christopher Gannatti, Bradley Krom, Tripp Zimmerman, Eswarie Subrahmanyam S. Balan, Zachary Hascoe, and Anita Rausch are registered representatives of Foreside Fund Services, LLC.
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