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Why My #1 Bet on Europe Is Soaring: ‘I Told You So’

It was just over a month ago that I appeared on the Fox Business Network and recommended that U.S. investors put their money to work in Europe.

To say that my recommendation was greeted with skepticism would be an understatement.

After all, as the host pointed out, Europe was on the verge of bailing out a Marxist government in the form of Greece.

And my closing recommendation to invest in Germany was greeted with a roll of the eyes and a barely stifled yawn.

Fast forward one month, and Germany is the hottest market on the planet. The German DAX closed above 12,000 for the first time and is up a whopping 24.1% in 2015.

That compares with a U.S. S&P 500 Index that is up a mere 1.48%.

Once you hedge out the currency risk, Germany is the single-best-performing stock market this year among the 46 I track on a daily basis at my firm Global Guru Capital, a Securities and Exchange Commission-registered investment adviser that is not affiliated with Eagle Financial Publications.

No wonder U.S. investors are descending upon the city of London trawling for European money managers as they shift assets out of the U.S. markets.

And they are moving money in a big way.

Some $35.6 billion has flowed into European equity funds so far in 2015, even as $33.6 billion has flowed out of U.S. equity funds over the same period, according to data provider EPFR.

Europe??s QE: The ‘Draghi Effect’

So why are German and European shares so hot?

Most notably, there??s the launch of the European Central Bank??s (ECB) program of quantitative easing (QE) by its President Mario Draghi.

Draghi has committed to buying ?60 billion per month of various forms of debt, thereby expanding the bank??s balance sheet by ?1.1 trillion between now and September 2016.

Knowing what happened with QE in the United States and Japan over the past few years, investors know which direction shares tend to go.

And flooding European financial markets with liquidity stands in sharp contrast to the Fed, which is expected to raise interest rates this year.

No wonder the German DAX made a monster breakout on Jan. 22 from its one-year trading range, the day after the ECB announced its version of QE.

Germany: The King of the Euro Zone

Considering it boasts the largest economy of Europe and the fourth-largest economy in the world, Germany has a remarkably low profile among U.S. investors.

Given its size and efficiency, Germany has been long considered the European Union??s growth engine. This wasn??t always so. The collapse of East Germany in 1990 and German reunification led to more than a decade of chronically high unemployment rates as more than 3 million former East Germans entered the labor force.

By 2005, German unemployment hit a peak of 11.208%. (Note that economic statistics in Germany are calculated to three decimal points!)

Market-oriented economic reforms introduced by then-Chancellor Gerhard Schroeder helped the German economy find its feet.

Following a rapid recovery from the 2008-09 recession, with gross domestic product (GDP) growth rates of 4.02% and 3.01% in 2010 and 2011, respectively, German economic growth slowed significantly in 2012.

Today, boosted by both the slide in oil prices and the tumbling euro, the German economy once again has a spring in its step.

German officials have suggested that they may raise their current forecasts for 1.5% GDP growth. Employment stands at record highs and real wages and consumption are growing at a healthy clip. The unemployment rate is expected to drop further, to 6.6%, in 2015, down from 6.7% last year. German consumer confidence just hit a 13-year high. Finally, higher-than-expected tax revenues helped the government to balance its federal budget last year, one year earlier than planned.

And lest we forget, Germany is also the global export champion. Eighty million Germans generate about as much value in exports as 1.36 billion Chinese.

Even before the collapse of the euro, Germany??s current account surplus hit ?215.3 billion ($244 billion) last year from ?189.2 billion in 2013.

That??s the largest current account surplus by any economy in history!

Hedging Your Currency Risk

The combination of quantitative easing and Germany??s export orientation make Germany one of my top recommendations for 2015.

But as a U.S.-based investor in Europe, you have an additional worry.

While the year-to-date performance data for the German DAX index is close to 25%, those returns are less than half that in U.S. dollar terms due to the tumbling euro.

Fortunately, iShares Currency Hedged MSCI Germany ETF (HEWG) offers a solution to this dilemma.

This exchange-traded fund (ETF) tracks the same MSCI Germany Index tracked by the mainstream iShares MSCI Germany ETF (EWG), providing exposure to German stocks while hedging out the euro??s decline.

The comparison of the performance of the hedged versus unhedged bets on Germany year to date is revealing.

hewg_0317

Since both ETFs track the same underlying index, the difference in performance is due solely to the decline of the euro against the U.S. dollar.

So follow the lead of Alpha Investor Letter subscribers and buy the iShares Currency Hedged MSCI Germany ETF (HEWG).

In case you missed it, I encourage you to read my e-letter column from last week about investing with alpha-based hedge fund ETFs. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.

Written By

Nicolas A. Vardy is the London-based International Economics Correspondent for Human Events.

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