European stocks and the corresponding exchange-traded funds are among this year's most resurgent asset classes, a theme made all the impressive when considering the euro's strength against the dollar and some political volatility in the region earlier this year.
The U.S. Dollar Index is down more than 8 percent this year while the euro is up 11 percent against the greenback. In other words, the 11 percent returned by WisdomTree Europe Hedged Equity ETF (NYSE: HEDJ) is all the more impressive when considering dollar weakness. Fortunately for HEDJ, the bull thesis for European equities could prove far more durable than does it for the euro.
“Euro bulls may be left leaning on the lamppost if they anticipate a rapid tapering of the bond purchase program to €40 billion (or less) or an outright termination anytime soon,” said WisdomTree in a recent note. “Short and simple. Easy money surprises by the ECB are the play here. It may be better to focus on (ECB president, Mario) Draghi than traditional politicians like (French Prime Minister Emmanuel) Macron.”
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HEDJ is proving its mettle against the backdrop of euro strength, but the ETF has an enviable long-term track record. Over the past three years, HEDJ has outpaced the MSCI EMU Index by an almost 2-to-1 margin. During that period, HEDJ's compound annual growth rate has exceeded the MSCI EMU Index by 400 basis points.
There remain supportive data points and potentially rewarding catalysts for eurozone stocks.
“Unlike the case with the euro, a bullish thesis for European equities is on sounder footing, in our view, especially when the market is compared to the U.S.,” said WisdomTree. “For example, the yawning gap between 3+ percent European dividend yields and shorter-end gilt-edged German government bonds is more than 4 percentage points, a stark contrast to the tiny margin in the U.S.”
Betting On The ECB
While eurozone economic data points are improving, those numbers still are not where the ECB wants them to be. Additionally, the central bank's inflation targets are not being hit, indicating that the ECB could extend its easy money policies. That would endanger euro bulls while potentially boosting HEDJ along the way.
“If the ECB instead decides to extend the program again and again and again, as it has been doing, euro longs could be vulnerable,” said WisdomTree. “Evidence is mounting that the easy-money program and an environment of very low interest rates will likely continue for years, throwing cold water on EUR bulls’ wants and desires.”
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