# is it better stick to euro based stocks



## galway_blow_in (27 Jul 2017)

i myself recently invested quite a bit in the financial markets , ive some money in a u.s corporate bond investment grade etf but most is in u.s domiciled equity etf,s which cover europe , about 10% is japan and pacific region however and im wondering if there is any real point in this , with the euro rising , it cancels out any gains in japan , australia etc , is the eurozone diversified enough to warrant being simply invested in this region alone

i have no etf,s which cover the usa and its more down to a fear of a rising euro v dollar  than the u.s market being more expensive than europe , the etf ( VEA ) is 21% pacific and that is by far my largest etf , the other being EZU ( eurozone ) , i also have less than half a dozen individual companies but this comes to less than 20 k 

im just wondering if those who often advise to simply buy a global etf ( which is usually 50% north america and the european end of it being predominantly uk  ) are ignoring currency 

this is not meant to be a  thread about my own situation BTW , was just trying to illustrate point about regional focus


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## Brendan Burgess (27 Jul 2017)

You have to look at the underlying economies in which the stocks are invested. 

For example, I have shares in CRH.  It's a euro denominated share, but it gets the majority of its earnings in other currencies  - US dollars, sterling etc.  

I have shares in DCC which are quoted in sterling.  But again, their profits are in diversified currencies. 

So a US domiciled equity ETF has probably more exposure to dollars than a Euro one, but the difference might not be as much as you think.

Brendan


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## ixus (27 Jul 2017)

@OP equity markets tend to rally on weaker base currency, see FTSE on cable, Dax on euro weakness on QE, S&P on USD weakness on QE. 

With that in mind, owning european stocks as the euro rallies is unlikely to see you gain much from asset appreciation. As euro rises, foreign flows would leave euro equities. 

This provides a good reason to be diversified across global stocks in order to counter fx flows. Whatever your views about equities in general.


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## galway_blow_in (27 Jul 2017)

ixus said:


> @OP equity markets tend to rally on weaker base currency, see FTSE on cable, Dax on euro weakness on QE, S&P on USD weakness on QE.
> 
> With that in mind, owning european stocks as the euro rallies is unlikely to see you gain much from asset appreciation. As euro rises, foreign flows would leave euro equities.
> 
> This provides a good reason to be diversified across global stocks in order to counter fx flows. Whatever your views about equities in general.



the s + p is up by a quarter since 2015 despite dollar strength

despite it being up more than 2.5% since april  , had someone in ireland bought the ftse three months ago , they are down nearly 4% in euro terms

my point being , currency appears to be a huge factor


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## ixus (27 Jul 2017)

That's what i said, fx is a huge factor. 

If you had bought the dax two weeks ago, you would be down 7% or more. Euro is up similar. But, if all your income is in euro, well, you're just down 7%. 

If you bought the S&P, you would be up in asset price but down in USD terms. 

Diversifying the portfolio reduces the effects of fx fluctations. 

Try and work out where you would be sitting Net in euro if you had done a 25% equal split into ftse, dax, nikkei and S&P two weeks ago.


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## galway_blow_in (27 Jul 2017)

ixus said:


> That's what i said, fx is a huge factor.
> 
> If you had bought the dax two weeks ago, you would be down 7% or more. Euro is up similar. But, if all your income is in euro, well, you're just down 7%.
> 
> ...



cant tell you two weeks ago but a month ago you would have seen the following

s + p = ( - 1.28 % )

dax = ( -3.59% )

ftse ( - 0.65% )

nikkei ( - 1.96% )


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## ixus (28 Jul 2017)

That's converted back to euro? Doesn't that show if you were diversified across 4 currencies, you would have better returns than if all in euro being down -1.6% on average against -3.59% in euro denominated dax. 

From two wks ago, I would have the following priced in euro approx:

Dax -4%
Ftse +2%
Nikkei +1%
S&P -1%

Average -0.5% against -4% euro denominated dax.


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## galway_blow_in (28 Jul 2017)

ixus said:


> That's converted back to euro? Doesn't that show if you were diversified across 4 currencies, you would have better returns than if all in euro being down -1.6% on average against -3.59% in euro denominated dax.
> 
> From two wks ago, I would have the following priced in euro approx:
> 
> ...



yes my results were converted back to euro ! ( as that is the only thing that matters for me since i live in ireland )

besides , the dax is down more than twice as much  this past month as  the overall european market ( i.e , the one im referring to )


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## ixus (28 Jul 2017)

Yes, because the euro has a greater impact on its economy as Germany is one of the world's largest exporters.

If you want to take the Eurostoxx50 at -2%. Well, then your diversified returns are at 0% versus -2% on the broad equity european equity market.  Even better.

It's like you are trying to argue that diversifying an equity portfolio globally won't smooth out fx fluctuations which is exactly what it does. You are then left with asset appreciation/depreciation due to other factors.

I would be more worried about holding corporate bond investment grade US etf's given the overall bond market moves as global banks begin their tightening cycle.


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## Jim2007 (28 Jul 2017)

galway_blow_in said:


> im just wondering if those who often advise to simply buy a global etf ( which is usually 50% north america and the european end of it being predominantly uk  ) are ignoring currency



Well how could you address currency in the first place?  If you hold large caps part of the gains and losses will be FX based (some of it they will have hedged, but possible not against your base) and on top of that part of the gains and losses on your on portfolio will be FX based.  Even if you could get the math right getting FX cover would take another chunk out of your returns.

Don't know what products are available to consumers in Ireland, but here (CH/DE/OA) clients tend to hedge any portion of the portfolio they intend to liquid over the short term - pensioners are a good example.


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## galway_blow_in (28 Jul 2017)

ixus said:


> Yes, because the euro has a greater impact on its economy as Germany is one of the world's largest exporters.
> 
> If you want to take the Eurostoxx50 at -2%. Well, then your diversified returns are at 0% versus -2% on the broad equity european equity market.  Even better.
> 
> ...





Jim2007 said:


> Well how could you address currency in the first place?  If you hold large caps part of the gains and losses will be FX based (some of it they will have hedged, but possible not against your base) and on top of that part of the gains and losses on your on portfolio will be FX based.  Even if you could get the math right getting FX cover would take another chunk out of your returns.
> 
> Don't know what products are available to consumers in Ireland, but here (CH/DE/OA) clients tend to hedge any portion of the portfolio they intend to liquid over the short term - pensioners are a good example.



hi jim , i dont profess to know as much as someone who works in this sector but what im trying to argue  is , is it better to simply own etf,s - funds which contain only eurozone based companies in order to completely rule out risk of FX ? , like for example the uk market is up a lot since brexit in sterling but due to very big depreciation of sterling v euro , it knocks any of the good out of it for someone in ireland

i could not find any american domiciled etfs which cover europe which happened to be hedged in a way which would serve a eurozone investor , i suspected they would not be very liquid anyway

is the eurozone not diversified enough as a market to own anyway ? , is it folly to consider it good value compared to the u.s market 

i know the textbook method is to simply own a global fund but most americans focus exclusively on their domestic market 

as it happens right now , im not all in on the eurozone , at most 60%


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## ixus (28 Jul 2017)

I'll try one last time. You are NOT eliminating fx risk. You are concentrating that fx risk in the euro. Diversifying significantly reduces the fx risk.

Most of the time, a very high %, equities move on the back of interest rate and fx movement.

 After that, a smaller % of the time, equities move on the back of earnings or specific sector news. Obviously these moves can be larger given it is stock/sector specific. 

It might be something like 200 days of the year, equities are moving due to fx or rates where 20 days of the year equities move due to specific news. (Taking 220 trading days in the year).

What you are seeing, by referencing Brexit moves, is that equity movements are generally one big fx or rate play. If I think the euro is going to 1.20/25/30, I am selling european equities. Similar, if it's going to 1.15/10/05, I am buying them.


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## galway_blow_in (28 Jul 2017)

ixus said:


> I'll try one last time. You are NOT eliminating fx risk. You are concentrating that fx risk in the euro. Diversifying significantly reduces the fx risk.
> 
> Most of the time, a very high %, equities move on the back of interest rate and fx movement.
> 
> ...



thats fine , dont reply to my posts again if they annoy you , i disagree with you , were i to adjust my portfolio in tandem with currency movements , id be an active investor , not what im looking for

il stick with my predominantly euro denominated stock funds , i dont view holding euro denominated stocks as having any FX risk , i could buy russian stocks and even they went up 40% in a year , if the ruble dropped 50% against the euro , im worse off , just wanted to raise the question to see what others thought about such an approach 

its also clear stocks dont move based on currency most of the time as you claim , the dollar was strong for the past two years yet u.s equities outperformed european ones , interest rates were also raised in the u.s unlike in the eurozone


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## ixus (28 Jul 2017)

You contradict yourself every time you mention how fx moves XYZ equity market and then reference how it can't be true because of the USD and the S&P. 

It's interesting your view can't be changed despite the number of examples and clear explanation. I do it for a living so, am pretty secure in what I am saying.  This is pretty much the basic of how any quant model works.

Best of luck with your investments.

Ixus


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## galway_blow_in (28 Jul 2017)

ixus said:


> You contradict yourself every time you mention how fx moves XYZ equity market and then reference how it can't be true because of the USD and the S&P.
> 
> It's interesting your view can't be changed despite the number of examples and clear explanation. I do it for a living so, am pretty secure in what I am saying.  This is pretty much the basic of how any quant model works.
> 
> ...



yeah your a trader , i looked up your history of posts


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## whatsmoney (5 Aug 2017)

Hi Ixus/galway_blow_in

I'm very interested in your discussion as I can see both sides stance (if that's possible)

I have just started to monthly dollar cost average into the below USD ETFs, but trying to get good fx diversification through  
the percentage allocations....

20% - VEA Developed Markets exluding USA
20% - EZU Eurozone
20% - IEMG Emerging Markets
40% - MGC/MGK/VTV, USA Large Cap/Growth/Value 

I've only done a couple of months so far.

I created and put in my transactions into a Google Finance portfolio, and according to that all my ETFs are up and in total I am up 108 euro.
(This euro amount is just a straight conversion from the USD amount I'm up, calculated at today's USD/EUR rate.)
However, my degiro account says I'm down 16 euro - due to USD/EUR rate going down since I started. Only 2 ETFs are up (EZU, IEMG).

I realise it's a very short time span  - but should I continue with implementing this strategy?
I'm planning to contribute into this for the next 5 years (or longer) .... should I keep at this over the long term?
I'm obviously concerned that I am going to be hit by a depreciating dollar, and my fx diversification mightnt work .... 

I would value your feedback on this


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## galway_blow_in (5 Aug 2017)

whatsmoney said:


> Hi Ixus/galway_blow_in
> 
> I'm very interested in your discussion as I can see both sides stance (if that's possible)
> 
> ...



im up slightly more in EZU than in VEA which is due to the weakening of the japanese yen and pacific currencies


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## ixus (5 Aug 2017)

The 124€ discrepancy. Does it represent a 1%, 5% or whatever part of you portfolio. If it's sub 1% is it minimal? Are you calcs possibly just off? The settlement point of the day at which fx was fixed could be a factor?

Regarding fx fluctuation concerns. Backtest against fx moves of 5-20% in the last 10 years. See how portfolio held up. 

As an aside, my concerns would be less with fx and more how late one is coming into a cycle. Some pretty big moves in last 18 months. But, if horizon is greater than 5 years might be ok.


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## whatsmoney (6 Aug 2017)

It's about 1.5% of portfolio at the minute.

I think I probably didnt explain my situation adequately in my original post. Basically when I look at my degiro portfolio I am down about 16 euro.
I have made 12 separate transactions on the ETFs (2 on each), across June and July.
The exchange rate used increased gradually from 1.126 to 1.175 across the period... and now when I value the portfolio
in August fx rate is at 1.177, resulting in a -16euro result.....

Separately, out of curiosity, I made a Google finance portfolio and filled in all the USD transactions as if I was hypothetically sitting in USA and
buying with USD... for the same USD transactions the portfolio is up about 125 USD (~ 108 euro at today's rate if I convert).
So if I was sitting in USA with this portfolio, as an investor, I'd be happy. 

I realise that it doesnt matter what currency you buy an ETF in, that the actual performance that results comes from the
underlying region the ETF covers. In the case of the Google portfolio, the investment is in USD, and because
the USD is weakening, it means the returns are greater, as 60% of the portfolio is focused on ETFs covering regions outside USA.

Essentially my worry is because I have to buy USD first before I buy the ETFs, and then I have to buy back out of USD to Euro when I want to 
value the portfolio, i am worried that my 'strategic' investment is nothing more than a bet on the USD/Euro fx rate at time of cashing in.
(I guess the fact I am dollar cost averaging over time should balance the costs I'm buying in at).

SO, as I see it I have the following choices:
1) Stick with it over the long term... the fxrates should balance out over time, and keep my fingers crossed if I eventually have to cash
in a substantial part of the protfolio, that the fxrate on that day will be  favourable. In this case, is my portfolio structure logically sound? (20/20/20/40)
2) (On galway_blow_in's point) Get out of the ETFs covering the USA region, and just hold EZU/IEMG/VEA - the weakening USD might
not necessarily translate into strengthened USA region ETFs (even though by quant theory it should)
3) Abandon this USD ETF strategy altogether, and buy similar UCITS Euro ETFs instead, even though they have the disadvantages that are well detailed already on this site.....
4) Abandon ETFs altogether and invest in shares- though I really dont want to do this as I see ETFs as the best way to get targeted diversification at low cost... and I dont
know enough about valuing shares properly to start buying into a basket of those. Also I dont want to invest in mutual funds due to their high fees.

Any advice is appreciated...


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## joe sod (6 Aug 2017)

galway_blow_in said:


> im up slightly more in EZU than in VEA which is due to the weakening of the japanese yen and pacific currencies


 
I think I have somewhat of a similar investment profile with US domiciled ETFs and stocks. Most of my investments are now in european and international ETFs and stocks. However I have been hurt by the big rise in the euro over past month or so in euro terms. Even though I have big euro based investments it has not insulated me from the rising euro. Basically the value of the euro based stocks have not risen as much as the euro and everything else when converted back to euros especially emerging market ETFs has gone down (in euro terms). I think thats just the nature of investments, the euro has risen and everything else including euro stocks have gone down when measured in euros but not when meausured against everything else. The same phenomenon happened when there was big rise in dollar everything looked to be falling until you converted out of dollars. You just have to look at euros themselves as an asset the only way to protect yourself really is to sell everything and hold euros which would be silly. Also I think the rise in the euro is done for now , the southern european economies are still too weak to cope with a rising euro and the ECB will intervene to stop it rising too much especially with Dragi in charge.


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## galway_blow_in (6 Aug 2017)

joe sod said:


> I think I have somewhat of a similar investment profile with US domiciled ETFs and stocks. Most of my investments are now in european and international ETFs and stocks. However I have been hurt by the big rise in the euro over past month or so in euro terms. Even though I have big euro based investments it has not insulated me from the rising euro. Basically the value of the euro based stocks have not risen as much as the euro and everything else when converted back to euros especially emerging market ETFs has gone down (in euro terms). I think thats just the nature of investments, the euro has risen and everything else including euro stocks have gone down when measured in euros but not when meausured against everything else. The same phenomenon happened when there was big rise in dollar everything looked to be falling until you converted out of dollars. You just have to look at euros themselves as an asset the only way to protect yourself really is to sell everything and hold euros which would be silly. Also I think the rise in the euro is done for now , the southern european economies are still too weak to cope with a rising euro and the ECB will intervene to stop it rising too much especially with Dragi in charge.



the orthodox view would be that you need to mitigate the rising euro by diversifying into dollar or perhaps sterling denominated equities as a weakening of both currencies should translate into a rising market in the usa and the uk etc , if i look at movements in the past month , i am still better off by not having been in dollar or sterling denominated equity markets ( though VEA has a uk percentage ) , the rising euro cancelled out any rise in the s + p and ftse


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## ixus (9 Aug 2017)

Worth a read:

https://www.bloomberg.com/amp/news/...-are-saying-about-the-threat-of-a-strong-euro


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## joe sod (12 Aug 2017)

galway_blow_in said:


> the orthodox view would be that you need to mitigate the rising euro by diversifying into dollar or perhaps sterling denominated equities as a weakening of both currencies should translate into a rising market in the usa and the uk etc , if i look at movements in the past month , i am still better off by not having been in dollar or sterling denominated equity markets ( though VEA has a uk percentage ) , the rising euro cancelled out any rise in the s + p and ftse



I think the euro traded as low as 0.9 dollars upto 2002, then the huge weakening in the dollar which reached its lowest point in 2012 at around 1.5 dollars to the euro. Of course that strength in the euro decimated the weak southern european economies. The dollar regained its strength with a big move in 2015. With the european economies only recently having somewhat of boom and many southern european economies still very weak I cannot see the euro regaining those levels. Europe needs a weak currency for a good few more years , currencies seem to move in long term cycles and this is too early merely 6 months into a european stock market boom for a big move up in the value of the euro.


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## Colm Fagan (12 Aug 2017)

I’ve just contributed to another forum on the merits or otherwise of Euro hedged global equity funds.  My comments may add some value to this discussion. 

In the other discussion, I expressed reservations on the merits of hedged equity funds, citing two examples from my own investments. 

One of my holdings is a UK company called Phoenix Group Holdings.  Its business is completely focused on the UK, and the shares are quoted in sterling.  If sterling falls, there is virtually no impact on the company’s operations, and the price is unaffected in sterling terms.  From my perspective as a Euro investor, the price has fallen, however.  I don’t want to be a currency speculator, so I hedge my exposure to Phoenix, effectively borrowing the value of the investment in sterling and putting it in into a Euro deposit so that, if sterling falls, the amount deposited (in Euros) remains unchanged, but the Euro value of my sterling borrowings has fallen.  Good news to counter the bad news in the fall in the Euro value of the shares.  Obviously, hedging is beneficial here.  It has a cost but it’s a cost I’m happy to bear to shield me from currency fluctuations. 

Another of my holdings is a UK engineering company called Renishaw.  It shares are also quoted in sterling, but its business is world-wide.  If fact, only 5% of its revenues come from the UK.  A significant proportion of its costs are incurred in the UK, however. 

What happens to its share price if sterling depreciates against other currencies?  The answer is that its share price *increases by more than the amount of sterling’s depreciation*, so the value (in Euros) of my shareholding increases.  Why does this happen? 

The reason for the increase in the Euro value of my shareholding is that sterling’s weakness has caused the company’s revenues to increase in sterling terms but they remain broadly unchanged in Euro terms, while its costs, a significant proportion of which are sterling denominated, reduce in Euro terms.  So, the result (from my perspective as a Euro investor) is broadly unchanged revenues (other than the 5% earned in the UK) but lower costs.  Unchanged revenues earned at lower cost mean a higher price in Euro terms, a significantly higher price in sterling terms.  In contrast with my investment in Phoenix Group, I do not hedge my Renishaw investment.  It would be a waste of money.

Looking at the Global Equity Fund, the companies underlying it consist of a mixture of Phoenix type companies and Renishaw type companies.  I would think that Renishaw type companies are in the majority.  If that is the case, then it is wrong to hedge the entire fund.  In fact, it would seem to be counter-productive and to introduce an unnecessary cost. 

I hope that these observations on a Global Equity Fund may have some relevance to this discussion.


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## galway_blow_in (12 Aug 2017)

Colm Fagan said:


> I’ve just contributed to another forum on the merits or otherwise of Euro hedged global equity funds.  My comments may add some value to this discussion.
> 
> In the other discussion, I expressed reservations on the merits of hedged equity funds, citing two examples from my own investments.
> 
> ...



i live in ireland so the markets im invested in have the same currency as myself , your talking about how sterling denominated assets effect you as someone living in euroland ?


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## Colm Fagan (12 Aug 2017)

You're right.  Your scenario is a mirror image of the one I've painted.  If you're invested in stocks whose businesses only have Euro exposure, then you don't have to worry about hedging, but if you're invested in a stock that has substantial non-Euro exposure (CRH is the example Brendan quoted in his initial reply), then you should think about currency hedging if you're worried about other currencies weakening relative to the Euro.


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## galway_blow_in (13 Aug 2017)

Colm Fagan said:


> You're right.  Your scenario is a mirror image of the one I've painted.  If you're invested in stocks whose businesses only have Euro exposure, then you don't have to worry about hedging, but if you're invested in a stock that has substantial non-Euro exposure (CRH is the example Brendan quoted in his initial reply), then you should think about currency hedging if you're worried about other currencies weakening relative to the Euro.



Il stick to what I have , I did buy put options dated out to January 2019 with a price 20% below where I bought in, to the value of less than  1% of my portfolio , hopefully those puts are worth nothing in eighteen months


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