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Value Of Euro Presenting Investment Opportunities In Europe

Summary

It’s not even just at the S&P 500 level where the investment opportunities lie. Smaller portfolio investors can also benefit from the downturn in the euro.

What’s rarely mentioned, however, are the opportunities at a micro- and macro-level, that this new reality brings.

And now that the euro is so cheap by historic terms, M&A opportunities in Europe that previously seemed out of reach are appearing on the horizon to American firms.

The dollar's ascent against the Euro over the past year has been given plenty of media coverage. The growth is almost always attributed to a strong recovery in the US economy, seemingly never-ending talk of an interest rate rise by Janet Yellen and the inherent instability in the Euro due to Greek's will-they-won't-they leave the Eurozone scenario.

Just think of all the cash on the balance sheets of US firms right now. Sure, they can give some back to shareholders (an increasingly popular choice) or look for M&A opportunities, which doesn't seem so unattractive in a low-growth environment.

The curve above looks dramatic in itself, but when applied to the billions of dollars at play in large M&A deals, it's a real factor to be considered. When FedEX announced it was buying TNT Express at the beginning of April for US$4.8bn, there was more than expanding into new markets for FedEx; FedEx had already attempted to purchase TNT a year earlier only to be knocked back. One year on in 2015 and the strength of the dollar against the Euro meant that FedEX saved over a billion dollars on the deal.

Even with depressed property prices in Europe, real estate in the US may be a better option. But what about corporate debt? As with the US, some of the bigger firms in Europe are (paradoxically) safter bets than their sovereigns. You're getting corporate debt rates with the built-in safety of a sovereign. Take Deutsche Bank, offering a 4.38% coupon, for example.

Why buy corporate debt in Europe when you can do it in the US? This is where the currency difference really begins to pay dividends: You buy the corproate debt now at the relatively lower price because of the dollar's strenght and when the Euro makes its inevitable recovery further down the line, you not only stand to gain 4.38%, or whatever the debt you've chosen yields, but also the premium offered by the rising currency against the dollar.

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.