Tag Archives: europe

Positioning From The United States Into The Eurozone

Summary The economy in the U.S. is deteriorating, while the Eurozone is prospering. The euro is about to take off due to fundamentals in current account and balance of trade. European stocks will be boosted due to good production and retail sales numbers. Investors are focused too much on the U.S., while they are totally ignoring what is happening in Europe. What they are missing is that Europe’s economy is actually improving. I will highlight some of the main key indicators of both economies and invite investors to jump into Europe and out of the U.S. First off, the trade balance, one of the most important indicators of export and import, has favoured Europe as the euro declined 20% against the U.S. dollar last year. Europe still has a positive balance of trade, while the U.S. has seen widening deficits. (click to enlarge) (click to enlarge) This translates into a current account deficit in the U.S., while Europe has a current account surplus. A positive current account is typically good for a currency so we should see the euro prosper against the U.S. dollar. The only reason why the U.S. dollar is so strong is because it is still the reserve currency. (click to enlarge) (click to enlarge) Second, the unemployment rate in Europe is really improving now, unlike the manipulated numbers in the U.S. The reason why the U.S. had such a major decline in unemployment rate is because a lot of people dropped out of the labor force (which we don’t see in Europe as more people actually have a job) and because the U.S. has seen a lot of part-time employment, especially in the low-paying service sector industry. (click to enlarge) (click to enlarge) Third, as I already suggested, the U.S. manufacturing industry is collapsing with a manufacturing PMI dropping to 52 in November 2015. All the jobs are going into the service sector. In Europe on the other hand, the manufacturing PMI is on the rise to 54. These trends tell me that GDP growth in the U.S. will decline, while GDP growth in Europe will improve. That also means that government debt to GDP will go up more in the U.S. (103%) than in Europe (92%). (click to enlarge) (click to enlarge) The trend in industrial production numbers confirms my previous statements. Year over year industrial production growth in the U.S. is flatlined at the moment, while Europe is improving. (click to enlarge) (click to enlarge) As the industry collapses in the U.S., factories need less capacity and this results in a declining capacity utilization rate to a low of 77%. In Europe on the other hand, we see a continuing improvement with capacity utilization well over 80%. (click to enlarge) (click to enlarge) Fourth, the consumer is also more confident in Europe as compared to the U.S. When we look at retail sales there is a huge discrepancy between the U.S. and Europe. In the U.S. we see a steady decline, while in Europe the retail sales are booming. Of course, a lot of these numbers depend on inflation and due to a strong decline in the euro, inflation in the Eurozone has been somewhat higher than in the U.S., boosting retail sales numbers. Nevertheless, it looks like the European consumer has more money in its pocket to spend than its U.S. counterpart. And keep in mind that the European savings rate is double (13%) that of the U.S. (6%). (click to enlarge) (click to enlarge) Conclusion: It looks obvious to me that Europe is the better deal here and investors should start looking to invest in Europe instead of the U.S. I believe the euro will be heading north soon due to improving current account surplus and industrial production. European stock markets will fare better due to higher GDP growth, manufacturing PMI, consumer sentiment and retail sales. An improving employment picture in Europe will boost the overall economy. Investors can choose out of a series of European ETFs, but the ones I recommend are the 4 largest: the WisdomTree Europe Hedged Equity ETF (NYSEARCA: HEDJ ), the Vanguard FTSE Europe ETF (NYSEARCA: VGK ), the iShares MSCI EMU ETF (NYSEARCA: EZU ), the SPDR EURO STOXX 50 ETF (NYSEARCA: FEZ ). These ETFs are the closest in replicating the price and yield of equities in the Eurozone. Of these ETFs the highest return on equity is found in the Europe Hedged Equity Fund. The reason for this is because this ETF yields higher returns when the euro falls against the U.S. dollar, which is what we saw happening in 2014-2015. Now that the euro is going back up, the returns in this ETF will be lower. This ETF invests mainly in stocks from Germany (26%), France (24%), the Netherlands (17%), Spain (26%) and Belgium (8%). The second highest return is found in iShares MSCI EMU ETF which invests mainly in stocks from France (32%), Germany (30%), Spain (11%) and the Netherlands (9%). To a lesser extent this ETF has exposure to Belgian and Italian equities. The FTSE Europe ETF has the third highest return with interests mainly in the U.K. (29%), Switzerland (14%), Germany (14%) and France (14%). Although these are European countries, this ETF invests in global companies like Nestle ( OTCPK:NSRGY ), Roche ( OTCQX:RHHBY ), Novartis (NYSE: NVS ) and HSBC (NYSE: HSBC ). So we can’t really say that this is a pure European ETF. For more European exposure you should look at EZU and HEDJ. The last ETF is the SPDR Euro STOXX 50 ETF which has the lowest return. One of the reasons of this low return is because it has a pretty high exposure to France (37.44%) and we have seen France underperform this year, not only due to its high unemployment rate, but also due to the Paris terror attacks. Other holdings are mainly invested in Germany (30%).

Monitoring Your Portfolio’s Dollar Sensitivity

By Tripp Zimmerman At WisdomTree, we continue to believe one of the most important themes impacting the global markets has been the strengthening U.S. dollar-and this is a trend we expect to continue for some time. As a result of the recent dollar strength, many U.S. multinationals with global revenue streams have reported currency headwinds as part of their earnings statements over the past year. This has hurt their performance compared to European and Japanese exporters, who have benefited from the weakening of the yen and the euro, respectively, against the U.S. dollar. This relative performance advantage is no surprise to us, because our research shows that these foreign markets actually performed better when their home currencies depreciated than when they appreciated. 1 Given this historical relationship and relative valuations, we continue to advocate for Japanese and eurozone exporters. But how should investors position their U.S. allocations? U.S. Corporations Continue to Warn about Dollar Strength “Sales by U.S. companies were $26.4 billion in the fiscal nine months of 2015, which represented an increase of 0.8% as compared to the prior year,” Johnson & Johnson (NYSE: JNJ ) reported. “Sales by international companies were $25.9 billion, a decline of 13.5%, including operational growth of 1.1%, offset by a negative currency impact of 14.6% as compared to the fiscal nine months sales of 2014.” 2 The Coca-Cola Company (NYSE: KO ) reported that over the most recent three months “fluctuations in foreign currency exchange rates decreased our consolidated net operating revenues by 8 percent. This unfavorable impact was primarily due to a stronger U.S. dollar compared to certain foreign currencies, including the South African rand, euro, U.K. pound sterling, Brazilian real, Mexican peso, Australian dollar and Japanese yen, which had an unfavorable impact on our Eurasia and Africa, Europe, Latin America, Asia Pacific and Bottling Investments operating segments.” 3 Determining Your Dollar Sensitivity WisdomTree believes currency sensitivity is an important factor that will continue to impact returns going forward, so to monitor the performance of this new factor, WisdomTree has created two new rules-based Indexes: The WisdomTree Strong Dollar U.S. Equity Index (WTUSSD) – This Index selects companies that generate more than 80% of their revenue from within the U.S. and then tilts its weight toward stocks whose returns have a higher correlation to the returns of the U.S. dollar. The WisdomTree Weak Dollar U.S. Equity Index (WTUSWD) – This Index selects companies that generate more than 40% of their revenue from outside the U.S. and then tilts its weight toward stocks whose returns have a lower correlation to the returns of the U.S. dollar. Since the inception of these Indexes, the U.S. dollar has strengthened 2.95% against a diversified basket of developed and emerging market currencies, leading to a performance advantage of 1.72% for WTUSSD compared to WTUSWD. 4 To try to understand what is behind this performance difference, we chart the median earnings and sales growth for the most recent quarter compared to the same reporting quarter one year ago, for both Indexes and the median for the entire universe. Year-over-Year Median Earnings and Sales Growth (click to enlarge) Strong Dollar Companies Displayed Higher Growth- The median earnings and sales growth for constituents of WTUSSD was more than 6% and 7% higher, respectively, compared to constituents of WTUSWD. We believe constituents of WTUSSD, or companies that generate more than 80% of their revenue domestically, tend to be less impacted by a strong-dollar environment-they aren’t focused on selling their goods and services abroad, and their import costs decrease with the rising purchasing power of the dollar. How Long Can This Persist? We have recently published a research paper, What a Rising U.S. Dollar Means for U.S. Equities White Paper , in which we illustrated the declining competitiveness of U.S. exports by graphing a ratio of exports of the U.S. economy over imports. As the U.S. dollar strengthened, the ratio of exports over imports weakened. Historically, we found that the impact can have a lag of around 36 months, so if history is any guide, we may not have seen the worst impact on exporters yet. At WisdomTree, our base case is still for a strengthening U.S. dollar, which may provide a continued headwind to U.S. multinationals with global revenue, but, depending on investors’ views, they can use the above Indexes to track the performance of either basket. Sources WisdomTree, Bloomberg. Johnson & Johnson quarterly earnings report, 10/30/15. Johnson & Johnson had a 1.21% weight in the WisdomTree Weak Dollar U.S. Equity Index as of 11/13/15. The Coca-Cola Company quarterly earnings report, 10/28/15. The Coca-Cola Company had a 0.71% weight in the WisdomTree Weak Dollar U.S. Equity Index as of 11/13/15. WisdomTree, Bloomberg, 5/29/15-11/13/15. U.S. dollar performance against a diversified basket of developed and emerging currencies is represented by the Bloomberg Dollar Total Return Index. Important Risks Related to this Article Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. Tripp Zimmerman, Research Analyst Tripp Zimmerman began at WisdomTree as a Research Analyst in February 2013. He is involved in creating and communicating WisdomTree’s thoughts on the markets, as well as analyzing existing strategies and developing new approaches. Prior to joining WisdomTree, Tripp worked for TD Ameritrade as a fixed income specialist. Tripp also worked for Wells Fargo Advisors, TIAA-CREF and Evergreen Investments in various investment related roles. Tripp graduated from The University of North Carolina at Chapel Hill with a dual degree in Economics and Philosophy. Tripp is a holder of the Chartered Financial Analyst designation.

Market Strategies For 2015 And 2016

Market Strategies For 2015 And 2016 | Seeking Alpha Seeking Alpha ‘ + ”; $(‘header’).insert({ before: element }); _bindEvents(); Effect.BlindDown(‘ipad_beta_promo_container’, { duration: 0.5 }); } } function _bindEvents() { var closeBtn = document.querySelector(‘#ipad_beta_promo_container #close_promo_ipad’); if (closeBtn) { closeBtn.addEventListener(‘click’, function () { createCookie(‘hide_ipad_promo’, 1, 1); Effect.BlindUp(‘ipad_beta_promo_container’, {duration: 0.5}); Effect.BlindUp(‘keep_fixed’, {duration: 0.5}); Effect.BlindUp(‘close_promo_ipad’, {duration: 0.5}); }); } } add_ipad_promo_if_needed(); })(); 1. Market outlook for rest of the year; expectations for 2016; what were the main surprises in 2015? Expect a dive on 16th December, when the Fed announces its rate hike. The Bank of New York Mellon (NYSE: BK ) reckons that during Fed tightening cycles since 1946, every time the Fed has raised rates, the market has gained three per cent over the following 12 months after this “lift-off”. ( Financial Times , 10th December, 2015, p. 21). Then expect a year-end rally on account of portfolio managers wanting to improve their annual performance. Surprises: The market crash of September AND the way that the Chinese government tried to halt it with its interventionist policies. 2. Investment strategy; where to find opportunities; how to separate winners from losers How to separate winners from losers: use our Economic Clock®! Winners where there is an excess supply of money, or outlook of an excess supply of money. Losers: where there is an excess demand for money, or outlook of an excess demand for money. INVESTMENT STRATEGY The winners are Europe, Japan, the US and China: the first two have an excess supply of money; the US has a tiny excess supply of money and an improved earnings outlook (courtesy of an excess demand for goods). China will have an excess supply of money once the Central Bank loosens. This is not happening currently: indeed, when the Central Bank supports the RMB exchange rate, it buys RMB and sells dollars. But it then removes these RMB from circulation, so they are not part of money supply any more. SECTOR WINNERS are clearly soft commodities on account of a bad weather outlook. SECTOR LOSERS remain the industrial commodities: over-investment based on China euphoria are at the root of these losses. 3. Japan outlook; Abenomics and BOJ policy A winner – for all the wrong reasons. Her Economic Time® will continue being that of an excess supply of money and an excess supply of goods. Abenomics is dead in the water: that’s because the third arrow got bent by politicians unwilling to reform. Thus, like everywhere else, the Central Bank is left to pick up the pieces. 4. China markets; weak data signalling stimulus soon? Policy response is likely in the first quarter of next year . Indeed, the weaker RMB will help importers raise margins; but I remain doubtful whether the weak RMB can lift increasingly sophisticated exports. 5. Commodity rout; how long will it go? Oil prices See the Investment Strategy of question two above. Industrial commodities will continue suffering on account of a global excess supply of goods. Oil prices: Have nothing to do with our beloved demand/supply approach. Instead, they are all driven by politics of Saudi Arabia not wanting to accommodate Iran’s desire to produce 1 million barrels of oil/day. My guess is that everyone will scramble for market share, meaning that that excess supply of oil gets exacerbated. The good news is that this represents a massive tax cut for the consumer. 6. A Fed rate hike seems more likely this month. What’s your take? I guess “yes”; but this really depends on what the FOMC decides to focus on. If it is the US economy, then a rate hike is probable. But if it switches the floorboards again and decides to focus on China and on what the World Bank as well as the IMF are pronouncing, then all bets are off. I’ll believe that future rate hikes will take place gingerly, a bit like walking on egg shells.