Trade Idea: European Exporters Set To Reap Benefits Of Weakening Euro And Strong External Demand

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Includes: HEDJ
by: Valtteri Ahti

Summary

European exporters are set to reap the benefits of a falling euro and overseas demand.

The euro is set to weaken further as it finally reflects weak European economics and super loose monetary policy.

WisdomTree has an ETF HEDJ that selects European export companies and hedges 50 % of eur/usd exposure.

The major economic blocks are decoupling. The US and UK are in the vanguard whilst the Europeans and Japanese are bringing up the rear. The divergence in economic growth rates has finally caused ruptures in fixed income and currency markets. Ergo the plunge of the euro, a wingless waxen bird that has defied gravity for too long. Like Icarus, she flew too far from parity.

The asset allocation backdrop favors equity over bonds as the global economy recovers, central bankers stimulate and abysmal interest rates render fixed income valuations challenging.

From a relative standpoint we like all things denominated dollar. The European sovereign crisis hit of 2011 put the European recovery into freeze mode. Despite Draghi's best efforts, policy failure - no fiscal stimulus and no structural reforms - means we are not hitting escape velocity any time soon. Summa summarum, we do not want European economic exposure.

The European export sector will be the first place to reap the benefits from a collapsing euro. In addition European valuations are more attractive than those of its US peers. In fact, US stocks have everything going for them except valuation.

We recommend neutralizing currency exposure for maximum benefit from a spiraling euro, which is liable to continue, perhaps as far as parity. PPP valuations are notoriously dysfunctional.

Hence an investment into European exporters benefits from a recovering and a diverging world. German car manufacturers are big in China and Louis Vuitton (OTCPK:LVMHF) bags are all the rage in the Orient. As US stocks are looking ever pricier it may be best to allocate some to European companies that can ride present and future macro trends. If all else fails, Draghi will be there to do whatever it takes. Whatever that is. And whenever it happens.

Wisdom Tree has a liquid ETF, HEDJ, that picks euroland companies that derives over 50% of their revenues from outside of the eurozone, with a minimum market capitalization of $1 billion. Furthermore the ETF hedges 50 % of the EUR-USD exposure.

Source: Bloomberg and Evli Bank

Source: Bloomberg and Evli Bank

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.