European equity investors could face two primary risks this year: exposure to Italian stocks themselves and the potential for the euro to be upset by political surprises. An answer to these problems could be European currency-hedged strategies.
Much has been made of the recent trend of dollar weakness, particularly against the euro. But there is a particular European strategy that has stood out from the rest: German exporters.
In a year of so many negative headlines emanating from Europe, it may come as a surprise to some that eurozone stocks, denominated in euros, are virtually unchanged for the year. With investors bracing for a potential recession in France and Italy, equity markets of individual European countries are starting to see some meaningful differentiation. One of those markets is Germany.
One of the most exciting developments thus far in 2015 has been Mario Draghi’s announcement of an open-ended quantitative easing program at the European Central Bank (ECB) to stimulate economic growth and stem deflationary risk to the eurozone.
In most cases, when investors think about international equities, they consider the fact that they are gaining exposure to the performance of the equities. However, that’s not the only investment they are making, they are also investing in the currency of the local market.
When an unhedged investment is made in foreign securities, the investor is not only taking on the equity exposure but also the currency risk. This can potentially increase the overall volatility of the investment.