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Europe's dysfunction makes for more trading opportunities

Close but no cigar. European Central Bank President Mario Draghi left interest rates unchanged Thursday. Yet again he reiterated that policymakers are ready to enact measures that will stimulate Europe’s frail economy, but it just won’t be this year. Traders protested by sending the Euro Stoxx 50 Index (^STOXX50E) down over 1%.

It’s news like this that has made Europe a great trade, according to Jeffrey Saut, chief investment strategist, at Raymond James (RJF). “I am trading it, I am not investing it.” Saut is skeptical the region will implement enough fiscal austerity. “For Europe to get to a better structural place longer term, there needs to be policy reform, particularly in France and Italy. I don’t think they are willing to tighten their belts enough.”

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So for now, Saut’s preferred investment vehicle is the WisdomTree Europe Hedged Equity ETF (HEDJ) because it strips out currency volatility. “The HEDJ is big cap Europe, with the currency hedged out of it.” The ETF has gained 6% this year even as the Euro (EURUSD=X) has declined against the dollar, which has helped push the PowerShares DB US Dollar Bullish ETF (UUP) up by nearly 10%. 

Investors will likely be afforded more European trading opportunities in early 2015. That’s when the ECB has pledged to ”reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments.” They also pledged to evaluate broader impact oil prices may have on inflation trends in the Euro area. WTI crude is sitting at $66 a barrel and Brent has followed suit sliding below $70.

While Saut may not be committing long-term capital to European stocks, he does favor select European companies. “There are a number of world class companies that are there, Nestle is located in Vevey, Switzerland but only 2% of revenues come from Switzerland.” Nestle, the world's biggest food company,  (NSRGY) counts the Americas as its largest market, followed by Asia, Oceania and Africa and then Europe.

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