The steady 2020 decline in the U.S. Dollar vs. the Euro currency exchange rate is becoming a powerful force propelling European equity performance for American owners. After years of subpar gains, Eurozone stocks could do better than U.S. names in 2021. With the advent of the Euro currency in 1999, perhaps next year will mark a watershed moment for the European Union project.
Image Source: ECB Website
The EURO STOXX 50 Index, Europe’s leading blue-chip index for the Eurozone, is a collection of leading businesses in the region. The SPDR EURO STOXX 50 ETF (FEZ) is a U.S. effort to replicate the index components, priced in U.S. Dollars, begun in 2002. The index holds 50 stocks from nine Eurozone countries including Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands and Spain. It is most similar to the Dow Jones Industrial Average in America, using 30 blue-chip names. I talked about the SPDR Dow Industrial ETF (DIA) and its underlying mechanics in an article last week here.
Daily calculations are even more complicated than the Dow Industrial single divisor setup that weights changes using individual price levels as the main determinate. Lately, the STOXX 50 index captures about 60% of the free float (shares not tightly held by insiders and family founders) market capitalization of the EURO STOXX Total Market Index, which in turn covers about 95% of the free-float market capitalization of the represented countries. The STOXX 50 Index was invented in 1998 by Deutsche Börse Group.
Image Source: Deutsche Börse Group Website
Changes in weights due to corporate actions (like takeovers, spin-offs, stock splits or index replacements) are distributed proportionally across all index components. The index divisors, which include currency exchange rate movements from different national trading bourses, and capitalization weightings using the free-float value of shares, are extra layers of complexity than faced by the Dow Industrial creation. The divisor effect is to lock-in gains from rising equities, while redistributing worth into laggards.
Today’s yield for the STOXX 50 ETF trailing yield is 1.85%, about the same as the Dow 30’s 1.80% yield, but slightly better than the S&P 500 rate of 1.55%. Annual management expense is running at 0.29%, with $1.8 billion in assets under management. Below is a breakdown of the industries and sectors owned by the ETF.
The largest ten positions by weighting on October 31st were ASML Holding NV (ASML), LVMH Moet Hennessy Louis Vuitton SE (OTCPK:LVMUY), Linde plc (LIN), SAP SE (SAP), Sanofi SA (SNY), Siemens AG (OTCPK:SIEGY), Total SE (TOT), L’Oreal SA (OTCPK:LRLCY), Unilever NV (UN) and Allianz SE (OTCPK:ALIZF).
Below are 12-month charts of the trading action in U.S. ADR and ADS securities of the group, priced in U.S. Dollars. I have also included some of my favorite momentum indicators of buying and selling. Accumulation/Distribution Line [ADL], Negative Volume Index [NVI] and On Balance Volume [OBV] signals are pictured for each company to compare and contrast. To generate the ADL measurement, intraday buying is reviewed. If the closing quote is nearer the high trade of the session consistently, the line is rising.
NVI reviews price and volume trends, but only on falling volume days vs. the previous session. Rising trendlines are good news. It is a terrific record of overhead supply and buying on weakness. OBV looks at net dollar interest by investors on up vs. down days, multiplying price change by volume. Again, healthy trading situations, especially in blue chips, include a nicely advancing line.
A word of caution on the indicators drawn. The primary exchanges in Europe will have more accurate readings of supply/demand momentum changes than the secondary American offshoots. Also note: the Allianz symbol did not pull up on StockCharts, so I have a similar BigCharts creation as the last graph.
Why Buy the Euro STOXX 50 Now?
My bullish feelings all come back to the weakening U.S. dollar exchange rate. I have talked about a lower Dollar as an investment theme since early summer on Seeking Alpha. An important reason soybeans and copper are rising sharply, crude oil and natural gas prices have bottomed, and the precious metals continue to see abnormally significant buying patterns all comes down to the devaluation of the U.S. dollar occurring in late 2020. Record Federal Reserve money printing, with M-1 money stock (printed cash in circulation and checking account sums) up almost +50% the last 52-weeks, and Uncle Sam borrowing close to $4 trillion in Treasury debt have been the necessary repercussions of the coronavirus pandemic economy.
All this fiat paper money floating around has consequences, in terms of overseas acceptance of dollar worth. The first knee-jerk reaction has been a bottoming in the internationally-traded commodities, priced in our local currency. Another reaction has been U.S. companies with vast overseas sales exposure witness a real benefit when repricing results back into our local currency. I have mentioned dozens of food, precious metals, commodity and overseas sales avenues to hedge your portfolio from the unfolding dollar devaluation. Stories during 2020 on Abbott Labs (ABT), Coca-Cola (KO), Dow Inc. (DOW), Texas Instruments (TXN), Caterpillar (CAT) and more, have highlighting how the dollar decline will positively impact operations.
Below are charts of the fading dollar currency vs. a basket of major trading partners through the U.S. Dollar Index, and a specific chart of the Euro’s strength vs. our local currency. We can argue the reasons, but the fact is the dollar has been in devaluation mode since May. Plus, I don’t see any variables on the radar to reverse the dollar slide.
Performance Numbers Improving Daily
The EURO STOXX 50 ETF chart has been super-bullish the last month, and it has outperformed many foreign-focused ETFs mirroring other regions of the planet. Below is the 1-year setup similar to the Top 10 holding charts. Notice the wonderful uptrends in the ADL, NVI and OBV indicators. I particularly like strong NVI readings for my investments, if at all possible. FEZ has entertained a robust NVI vs. a slowly increasing price trend since June.
Here are some comparison graphs for total returns, including dividends, from 1-month to 5-years vs. the Dow Industrial, SPDR S&P 500 (SPY), iShares Japan Nikkei 400 (JPXN), iShares MSCI Australia (EWA), iShares MSCI United Kingdom (EWU) and iShares MSCI Canada (EWC) ETFs.
A EURO STOXX 50 ETF position is not necessarily a bet that Europe’s economy will perform better than the U.S. version in 2021-22. It “is” a bet that the Euro currency will hold its value or grow against than the U.S. Dollar. If the Eurozone does expand faster than America in coming years, without doubt owning the FEZ ETF product will be a hugely positive decision in portfolio design. Holding a strengthening overseas economy, witnessing an outsized currency swing higher is usually a winning combination for foreign equity ownership.
There are risks. First, the coronavirus wildcard could easily create a double-dip recession in Europe. The new spread curve for COVID-19 infections this fall/winter has been just as bad as the U.S. situation. Second, we are weeks away from another finish line in the Brexit saga. Great Britain is close to cutting all economic ties with the Eurozone on December 31st. Hopes for a compromise deal on how to handle trillions of Euros in trade are fading as I write this article. And, British leadership seems OK with just darting for the exits on January 1st, while working out the details later. Either or both issues could keep the FEZ price down into early 2021. However, investors again today (December 1st) seem oblivious to the Eurozone economic risks, and have bid up the Euro-adjusted (Dollar valuations are weak today by -0.7%) FEZ price almost +2%.
My conclusion: If you want another selection to diversify away from U.S. assets, the EURO STOXX 50 ETF is a terrific way to accomplish such. Don’t laugh, but reputable economists and long-time famous investors are preparing for a 30-40% drop in the U.S. currency next year. If this kind of decline plays out, holding only U.S. assets will be a difficult proposition to retain your level of wealth today vs. what’s taking place globally.
The adoption of a common EU bond issuance in October has opened new competition for “risk-free” Treasury bonds and U.S. dominance of global financial markets since the end of World War II. Don’t overlook the region for your investment capital.
Thanks for reading. This article should be a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
Want to read more? Click the “Follow” button at the top of this article to receive future author posts.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in FEZ, DIA, ABT, KO, DOW, CAT, TXN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.