European stocks are rallying this year as the economy is gaining strength and earnings have rebounded. In 2016, Eurozone's GDP rose at a faster pace than the US, for the first time since 2008. Other important economic indicators also confirm the trend.
Additionally, European companies have more revenue exposure to overseas markets than their American counterparts and the brightening outlook for global growth bodes well for them. European companies derive about half of their revenues from abroad compared with about 40% for S&P 500 companies.
Fourth quarter 2016 marked the end of earnings stagnation in the Eurozone and earnings grew for the first time in four years. Thanks to the rebound in commodity prices and rising interest rate expectations, earnings estimates for the group have been improving.
Another reason to consider Eurozone stocks now is their attractive valuations. The S&P 500 index currently trades at a price to earnings multiple of 21.0 compared with 17.6 for the Euro Stoxx.
However, political risks in the region have been rising this year with upcoming elections in Germany, France, the Netherlands and possibly in Italy. Then there's Brexit-related uncertainty too. These may result in a higher volatility for Eurozone stocks.
Investors should also remember that due to the monetary policy divergence, with the Fed raising rates and the ECB staying accommodative, the US dollar may continue to strengthen against the Euro. Thus, currency hedged ETFs that provide exposure to stocks in the region while hedging out the currency risk are the best options to consider.
To learn more about the two ultra-popular currency hedged Eurozone ETFs, the WisdomTree Europe Hedged Equity ETF (NYSEARCA:HEDJ) and the iShares Currency Hedged MSCI Eurozone ETF (NYSEARCA:HEZU), please watch the short video below: