In a note which would have been better-timed before the 6%-plus rally of the past few sessions, Citi strategists say the global bull market is aging, but not finished, and see a 20% gain between now and year-end 2016.
Not denying that global earnings aren't going to look good, Citi says stocks have already priced in this weakness.
Favored regions are those where QE is still going on: Europe ex-U.K., and Japan.
Due to a slowdown in emerging markets and softer output in the U.S., the World Bank downgraded its outlook for global economic growth this year, lowering its forecast by 0.2% to 2.8%. The bank expects growth of 3.3% in 2016.
With regards to the U.S., the World Bank decreased its 2015 prospects by 0.5% to 2.7%, saying a brutal winter sapped output in Q1 despite the economy now gathering steam.
"After an examination of three of the most successful currency hedged products, we believe first to market is far and away the most important driver of product success," says Susquehanna's Doug Sipkin, bullish on WisdomTree's (NASDAQ:WETF) ability to continue to pull in the lion's share of inflows into currency-hedged ETFs, even with rivals like Deutsche an BlackRock offering competing products.
Four of this year's top 10 ETF flow recipients this year are currency hedged, writes Chris Dieterich, with WisdomTree's Europe Hedged Equity Fund (NYSEARCA:HEDJ) pulling in $13B, Deutsche's EAFE Hedged Equity ETF (NYSEARCA:DBEF) $8.7B, WisdomTree's Japan Hedged Equity ETF (NYSEARCA:DXJ) $3.2B, and iShares' Currency Hedged MSCI EAFE ETF (NYSEARCA:HEFA) $2.3B.
Not necessarily a bear on American stocks, the global chief investment strategist suggests investors tamp down their return expectations given the rich values, and instead move a little money into cheaper international names.
“Investment professionals advocate diversification, but not everyone follows it. And U.S. dollar-based investors are structurally overweight in stocks. Right now it is a timely moment to reduce their allocation."
Much of the appreciation in U.S. stocks over the past few years, he says, is due to multiple expansion, rather than earnings growth.
While many investors cite volatility reduction as a rationale for currency hedging, a white paper from GMO's Catherine LeGraw argues: 1) Volatility may be cut over the short-term, but not over longer horizons; 2) Volatility benefits have been reduced over time as companies become more global; 3) Even if volatility is lowered for international holdings, it isn't reduced for the whole portfolio as the hedging simply makes holdings more correlated with U.S. stocks; 4) Hedging introduces leverage and hence tail risk (see the move in the Swiss franc).
WisdomTree (WETF -2.6%) has ridden a couple of star currency-hedged funds - DXJ and HEDJ to big profits.
There's also Deutsche's DBEF, and not surprisingly a bunch more have recently come to market like [[DBRE}} and DBIF. BlackRock this week filed for 11 new currency-hedged ETFs.
LeGraw: "Currency management is a useful tool when done for the right reasons: because of a high-conviction view, or a desire to mitigate an identified risk exposure. We caution that a simple currency hedging strategy may not achieve these objectives.”
BAML's money manager survey earlier this week showed a rush of money heading into European stocks in wake of the ECB's QE program.
One possible beneficiary is WisdomTree Investments (NASDAQ:WETF), whose Japan Hedged Equity Fund (DXJ) saw billions of inflows in late 2012 and 2013 as a preferred vehicle for going long Japan but not the yen following the BOJ's massive QE program. The inflows helped WisdomTree become a 3-bagger in 2013.
Flows now look to be targeting a similar product WisdomTree has for Europe, the Europe Hedged Equity Fund (NYSEARCA:HEDJ). Deutsche has a European hedged equity fund as well, DBEF.
The JPMorgan Diversified Return Global Equity ETF (JPGE) started trading earlier today, marking the firm's entrance into the ETF industry.
JPGE will track the FTSE Developed Diversified Factor Index, a basket of equities from developed global markets which meet the relative valuation, price momentum, low volatility and market capitalization requirements.
While the fund will track this index, it will also include an almost active tilt which may help JPGE outperform traditional market-cap-weighted ETFs.
The db X-trackers Harvest CSI 300 China A-Shares Fund (ASHR) has lowered its fee from 1.08% to 0.82%; closer to what other funds charge for similar exposure.
The db X-trackers MSCI Japan Hedged Equity Fund (DBJP) and db X-trackers MSCI Germany Hedged Equity Fund (DBGR) has reduced fees from .50% to 0.45%; similar to the firm's other developed market ETFs charge.
The iShares Currency Hedged MSCI Japan ETF (HEWJ) and Germany ETF (HEWG) will hold a portfolio of large- and mid-cap Japanese and German equities (respectively), while mitigating exposure to fluctuations between the value of the Japanese yen and euro (respectively) against the U.S. dollar.
The iShares Currency Hedged MSCI EAFE ETF (HEFA) represents a more global approach and will hold a portfolio of large- and mid-cap equities in Europe, Australasia, and the Far East, while mitigating exposure to fluctuations between the value of the component currencies and the U.S. dollar.
This sector of the ETF universe is currently dominated by WisdomTree (WETF) and Deutsche Bank (DB) sponsored funds.
The Market Vectors MSCI International Quality ETF (QXUS) and the MSCI International Quality Dividend ETF (QDXU) will both track the MSCI ACWI ex-U.S. Index which includes large and mid-cap stocks across 42 countries. Both funds have expense ratios of 0.45%.
The Market Vectors MSCI Emerging Markets Quality ETF (QEM) and the MSCI Emerging Markets Quality Dividend ETF will both track the MSCI Emerging Markets High Dividend Yield Index which includes large and mid-cap stocks across 19 emerging market countries.
Mebane Faber updates countries' cyclically-adjusted price-earnings ratios (CAPE) for the start of the year, and Greece, Russia, Ireland, Argentina, Hungary, Jordan, Austria, and Lebanon make the list of the cheapest - all under 10.
How did the CAPE do in 2013? If you bought the 5 highest-priced countries - Peru, Colombia, Indonesia, Mexico, and Chile - you would have lost 17.8%. If you bought the 5 cheapest - Greece, Ireland, Argentina, Russia, and Italy - you would have gained 20.7%.
WisdomTree's (WETF) blockbuster Japan Hedged Equity Fund (DXJ) may soon be facing stiffer competition as iShares (BLK) files to bring to market the iShares Currency Hedged MSCI Japan ETF. DXJ is the most popular U.S.-listed ETF YTD, bringing in about $8.5B, and now with $10B in AUM.
Along with a Japan currency-hedged fund, iShares also files to list the Currency Hedged MSCI Germany ETF and the Currency Hedged MSCI EAFE ETF.
Together the three will also challenge Deutsche Bank's suite of hedged funds - Japan (DBJP), Germany (DBGR), and EAFE (DBEF). Summed up, Deutsche's offerings have about $320M in AUM.
iShares, of course, has popular non-hedged funds for each of these areas: Japan (EWJ), Germany (EWG), and EAFE (EFA) - together these have about $60B in AUM.