Much has been made of the recent trend of dollar weakness, particularly against the euro. As of this writing, it was at $1.24. As recently as April 2017, it was at $1.06.1
Has It Mattered for Equity Investors?
On the face of it, the answer to this question has been yes. U.S. investors haven’t necessarily fled European stocks—but they have fled currency-hedged equity strategies. Importantly, we have to call this trend what it is: chasing past returns.2
From ratio analysis of the return of the WisdomTree Germany Hedged Equity Index (hedged) vs. the WisdomTree Germany Equity Index (unhedged), we can see that since early January 2017 to April 17, 2018, the unhedged version of the same stocks has outperformed by more than 17%. When investors go “unhedged” with their European exposures today, this 17% is what they’re thinking about. It’s just “FOMO”—Fear of Missing Out on further euro appreciation (even if almost all investors we speak to would tell us they don’t know where the euro will go from here).
The reality is that there is no reason to assume that either the hedged or unhedged version of these same stocks will always outperform or always underperform. Can the euro appreciate further from here? Absolutely. But everything we know today, whether central bank policy or shifts in U.S. administration policy, is already reflected in the 17% move. What don’t we know currently that can cause the next bout of euro appreciation? That’s the true question that unhedged European equity investors should be asking.
Ratio of WisdomTree Germany Hedged Equity Index to WisdomTree Germany Equity Index (Rising = Euro Depreciating; Falling = Euro Appreciating)
Exporters vs. the Broad Market Capitalization-Weighted Benchmark for Germany
Digging a layer deeper, WisdomTree developed the WisdomTree Germany Hedged Equity Index to deliver distinctly different performance than the MSCI Germany Index. Our Index is dividend weighted and selects stocks that have less than 80% of their revenues from inside Germany, as opposed to market capitalization-weighted with a broad market focus.