B1 Intermediate UK 55 Folder Collection
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Stronger Euro is bad for Eurozone equities, say strategists, and here's the proof.
Emmanuel Macron wins the French election, clouds of political risk lift, and the Euro rises 7% on a trade-weighted basis.
Eurozone equities head south, and in July, eight consecutive months of upgrades to European earnings forecasts come to an end.
But there are also reasons to think that this adjustment will not last much longer.
Earnings, after all, are still set to rise this year,
and some effects of a stronger currency can be mitigated through hedging.
A stronger Euro will reduce input costs, especially dollar-denominated ones like energy and commodities.
It will also make imports cheaper.
That way, helping keep inflation down, and moderate pay demands from companies' workers.
Meanwhile, the recovery in the Eurozone economy itself is gathering pace, and that is good for European companies.
It's one reason the currency is appreciating.
In any case, the currency index is still well below its mid-noughties peaks,
and look at this chart which shows the inflation-adjusted, trade-weighted exchange rate for the old Deutsche Mark.
You can see this in the mid 1970's and again in the mid 1990's,
German exporters coped with the Mark at much higher levels than today's Euro equivalent.
Finally, over the long term, Credit Suisse Research Institute points out that exchange rates make little real difference to overall returns.
So while there may be reasons to worry about the durability of European corporate earnings, exchange rates are not foremost among them.
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Strong euro, weak equities? | Short View

55 Folder Collection
Crystal Wu published on August 21, 2017    Crystal Wu translated    Samuel reviewed
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