European Exporters—Where Are The Risks?

As of this writing, the market was still adjusting to the new administration of President Donald Trump. It is difficult to form reasoned conclusions about how assets should be allocated, given the number of different policy concerns yet to be specified and decided.

Import Tariffs = Great Headline, Frightening Policy

One thing we’re hearing a lot about is tariffs or a border adjustment tax. With Trump’s protectionist rhetoric, it would seem we’re heading to some type of additional taxes on imports. While questions (When? With which specific countries? And with which specific details or provisions?) remain to be figured out, it’s worth analyzing the WisdomTree Europe Hedged Equity Index with this thought in mind, as well as considering the balance of other risks that may be on the table.

Valuation: The Starting Point

Looking at the estimated price-to-earnings (P/E) ratio of the WisdomTree Europe Hedged Equity, MSCI EMU and MSCI Europe Indexes, there is a discount of approximately 16% to 17% compared to that of the S&P 500 Index.¹ With U.S. markets at or near record highs, we’re seeing more and more investors considering taking a portion of these profits and thinking about markets outside the U.S.

Relative valuation, therefore, is the point that begins the European equity conversation.

Risk #1: A Trump Import Tax Plan

Given concerns about Trump’s import tax threats, an important point of comparison among European-focused investments regards how much revenue is actually coming from the United States.

Tilting toward Exporters Appeared to Place Bigger Relative Emphasis on Emerging Markets

Exporters Emphasis on EM

Nearly 9% More Revenue from Emerging Markets: Besides shifting the focus away from Europe, the biggest tilt to exporters from Europe was nearly 9% more revenue coming from emerging markets with the WisdomTree Europe Hedged Equity Index than either the MSCI Europe or MSCI EMU Indexes. Most of this difference came from approximately 2% to 3% more revenue from Brazil, 1.5% to 2% more from China and 2% more from Mexico.

Approximately 2.5% to 5% More Exposure to Revenues from the U.S.: As can be seen, there is greater emphasis on revenue from the U.S., but there is less relative difference there than what we noted for emerging markets.

Similar Revenues from the UK: With the British pound trading at a level of $1.24 as of this writing,²it raises an important question relating to any exports to the UK becoming more expensive. The WisdomTree Europe Hedged Equity Index and MSCI EMU Index had a very similar level of revenue from the UK. The MSCI Europe Index had approximately twice as much given that it is the only Index of the three shown with constituents from within the UK.

Exporters Are in the Market Capitalization-Weighted Benchmarks: We should also note that the strategy of “tilting toward exporters” does not focus on smaller, more esoteric European companies. The weight of the commonly held firms in the MSCI EMU Index is almost 50% and almost 25% in the MSCI Europe Index, notably lower due to large markets such as the United Kingdom and Switzerland not trading in euros and not being eligible for inclusion in the WisdomTree Europe Hedged Equity Index.³