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European Stocks Continue to Outperform

David Becker
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European Stocks Continue to Outperform

While US stocks have been consolidating over the past week, foreign stocks continue to show signs of strength. The EAFE iShares (EFA) is now trading above its 200-day moving average after recently exceeding its late November peak. That means that stocks in Europe, Australasia, and the Far East are back in uptrends. In addition, foreign shares are doing better during 2015 than U.S. stocks. Central banks in Europe, Australian and Asia (BOJ and PBOC) are easing rates and therefore their equity markets are benefiting.

In fact, EAFE iShares have outpaced the S&P 500 a three to one margin this year. That raises questions for American investors. For one thing, it suggests that investors might want to do more rotating from U.S. to foreign shares. It also raises a question, however, about how to deal with currency considerations.

Foreign buyers in European stocks can consider hedging their exposure to the European currency. Since a US buyer is actually purchasing stocks that are denominated in Euros, an increase in the stocks can be offset by a decline in the Euro. Since the quantitative easing program set forth by the ECB will likely lift stock but reduce the value of the Euro hedge against the weaker Euro might be prudent.

When comparing the returns of the Germany iShares (EWG) to the Wisdom Tree Germany Hedged Equity Fund (DXGE). The DXGE is doing much better. Since July, the DXGE has gained 6% versus a -6% loss in the EWG. The DXGE is up 12% during 2015 versus a 6% gain in the EWG. That difference is entirely due to the weaker Euro. At the moment, both German ETFs are rising. But there’s a choice to make. Until the Euro shows definite signs of a bottom, however, the longer range trend appears to favor hedging against it with the DXGE.

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