By Nicholas A. Vardy, CFA
This marks the first time European companies have outpaced U.S. stocks since 2008.
European stock markets' ace in the hole
Of course, cheap stocks can remain cheap for a long time.
So the real upside for European stocks comes from the European Central Bank (ECB) recent introduction of quantitative easing (QE). Recall that QE boosted has both the U.S. and Japanese stock markets over the past few years.
After years of hemming and hawing, ECB announced in mid-January that it plans to spend over €1 trillion buying bonds. I'm betting that the current round of QE in Europe is just the start of long commitment to QE. After all, European banks still have €1 trillion in losses left on their books before the inflationary impact of QE kicks in. So the size of the current program will hardly make a dent in the problem.
All this is good news for European share prices.
QE has been always a big boon to financial assets. As the extra QE funds get recycled, prices of assets like European stocks and property will be bid up.
And with European stock markets both "under-owned and under-loved," there is a lot more upside in European assets compared to a fully valued U.S. market.
How to deal with a collapsing euro
The euro already has plummeted 16.05% against the U.S. dollar over the last year. And with the introduction of QE, the euro is likely to remain depressed for years.
On the one hand, this is a big boost to the stocks of export-oriented European companies. A weaker euro makes European exports more competitive, boosting top-line revenues in euro terms.
On the other, a weak Euro poses a challenge to a U.S. dollar investor. Over the past year, the fall in the value of the euro roughly canceled out gains in European stock markets when these were translated back into U.S. dollars.
So you need to hedge your bets on European stock against the impact of a weak Euro.
The WisdomTree Europe Hedged Equity Fund /zigman2/quotes/207911216/composite HEDJ -2.74% does exactly that. Focusing on European companies worth more than $1 billion that generate at least half of their revenue outside of Europe — revenue presumably boosted by a weak euro — HEDJ offers a solid fundamental bet on European stocks with a built-in hedge against the euro decline.
Leather-jacket-clad Greek Marxist Finance Ministers notwithstanding, HEDJ is already up an impressive 9.13% in 2015.
With the U.S. bull market showing signs of its age, and European stock undervalued, I believe the hedged bet on European stocks has plenty more to go.
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