CAPITALIZE ON EUROPEAN CENTRAL BANK CHANGES WITH CURRENCY-HEDGING
There has always been a strong case for European equities. But what about the euro risk? Learn how hedging the euro could help reduce volatility in our podcast. Learn more in our podcast.
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Director of Research
Europe has been one of the primary risks for the global economy—with sluggish growth, over-leveraged countries and banks being prime concerns for many investors. We believe that tides are changing due to shifting policy winds among central banks. We believe that the European Central Bank's expanded asset-purchase program will continue to weaken the euro against the dollar and provide support for local equity markets.
The market environment is always changing, and the rebalance process plays an important role in ensuring that an Index weights back to its fundamentals. In this piece, we have attempted to showcase how the rebalance process forces the discipline of reweighting back to the fundamentals and the beneficial impact the process has on valuation ratios.
The WisdomTree annual rebalance is a key element of the added value of WisdomTree’s Index methodology. We interpret another year of double-digit dividend growth as a very positive indicator of underlying market fundamentals and believe it helps provide a notable foundation for potential future gains.
We’ve seen growing interest in the degree of exposure to state owned enterprises (SOE) in various investment strategies. State owned enterprises are typically defined as companies that are either wholly or partially owned or operated by a government. Some investors feel government ownership can negatively impact the operational aspect of a company because government owned companies can be potentially influenced by a broader set of interests beyond generating profits for shareholders.
Each year, the rebalancing process refreshes the constituent weights of WisdomTree Indexes, moving them back toward a measure of relative value. As is the case with any approach looking to take advantage of the relatively less-expensive part of an equity market, the larger uncertainty regards not whether the stocks are over- or undervalued, but rather how long it will take broader market participants to actually respond and start pushing up prices.
My trip to Japan reinforced my views that Japan should be one of the most preferred destinations for global investment capital over the coming years. Japanese valuations have come down as Japanese earnings have grown more than stock prices. There is increased coordination from the government and central bank to reignite inflation and end the deflationary slump once and for all.
A common perception is that smart beta indexes always involve a small-cap bias in their construction. This is not true for WisdomTree’s broad-based and large-cap Indexes, which often have a larger-cap bias relative to traditional market cap-weighted indexes. We quantified in this piece the extent of that large-cap bias. We also addressed the comment that smart beta indexes inherently are value-tilted strategies.
Recently, currency-hedged equities have gained traction to neutralize the FX risk and target the local stock market returns. I have been talking to clients about currency-hedged strategies for much of the last five years, and virtually all conversations start like this: “Why should I hedge my currency risk?” But that is perhaps the wrong starting point. A more natural starting point to me is this: Why is it beneficial to add currency risk on top of local equities?
We feel investors could benefit by including exposure to European equities in a diversified portfolio over the long term. With potential economic green shoots perking up in the European landscape, the time could be ripe to consider the tools and options available across European equity indexes.
2013 marked a particularly strong year for equities in the developed international space, which, along with the United States, led the charge among global equity markets. Numerous macroeconomic tailwinds buoyed sentiment surrounding the developed international markets, including the eurozone returning to positive growth in the second quarter of 2013 and the Bank of Japan delivering bold monetary targets, reflecting overall accommodative monetary policies from central banks.
Each year, WisdomTree believes it is important to reset Index weights and exposures away from what has been driven by share price performance and toward what has actually occurred in terms of fundamentals. The following analysis focuses on the WisdomTree Europe Indexes, especially in the small-cap segment.
The WisdomTree annual rebalance is a key element of the added value of WisdomTree’s Index methodology. We interpret Japan’s current valuations and double-digit dividend growth as a very positive indicator of underlying market fundamentals. We believe these fundamentals, coupled with the ongoing third-arrow reforms, should help provide a notable foundation for potential future gains.
WisdomTree has one of the broadest sets of Indexes focused on international equities that are not weighted by market capitalization. In essence, we are looking to illustrate how these Indexes with at least five years of performance history were exposed to various factors.
Recently, European markets have performed strongly, with investors focusing on the economic recovery that has been building momentum. It is becoming difficult to remember that a few short years ago there was widespread debate about whether the European Monetary Union (EMU) would continue to exist.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. To obtain a prospectus containing this and other important information, please call 1-866-909-WISE (9473) or click here to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing including the possible loss of principal. Past performance does not guarantee future results.
You cannot invest directly in an index.
There are risks associated with investing, including possible loss of principal. Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, real estate, currency, fixed income and alternative investments include additional risks. Due to the investment strategy of certain Funds, they may make higher capital gain distributions than other ETFs. Please see prospectus for discussion of risks.
Jeremy Schwartz is a registered representative of Foreside Fund Services, LLC.
WisdomTree Funds are distributed by Foreside Fund Services, LLC.