European Markets Are Up 15% in 2015, Bravo! But Wait, Have You Seen The Euro?

Those investors who entered 2015 long of European Equities vs. other Developed Markets seem to be patting themselves on the back currently. No doubt the performance looks great on paper. If it only were that simple. The local returns are meaningless if they are generated in a currency that is falling faster than an elephant attempting to cross the Embankment on a two-wheeler!

 

The Euro is down 13% year to date with the European markets (Eurostoxx) up 15%, making the dollar adjusted net return equivalent to only +1.35%! Compared to the US S&P 500 index which is down 1% year to date, it really is not that much different. Only the savvy investors who had the foresight to hedge their Euros (sell Euros to buy Dollars) deserve a pat on the back. And after that, perhaps a check in the post for another $100 million to manage. This distinction is important to make because any currency is only as good as its buying power. If you are holding something that is deteriorating whilst your buying power is not improving, then you are not really better off.

 

Now is it wrong to be long of European markets? Not at all. European earnings are nudging higher and the region is still “cheap” vs. other Developed Markets. The Dow Jones Stoxx 600 12-month trailing Earnings Per Share is picking up, the economic data is getting better and the ECB is buying 60 billion euros worth of bonds per month until September 2016 or until inflation is pushed up back towards the 2% target.  Accommodative monetary policy plus improving economic growth provide compelling reasons to be overweight Europe.

 

Investor flows do help as well. With a further 4.6 billion USD net inflow this week, this brings the year to date figure to $33 billion for the region. To put this number in perspective, cumulative outflows since the middle of 2007 stood at a whopping $75 billion. There is still some way to go before reaching those previous highs.

 

So before you call your hedge fund manager to sack them for underperforming the European benchmark, cut them some slack. Would you really have done any better just being “long?”