Take heart, international investors. The U.S. dollar has finally showed signs of coming off its highs, and fresh investment opportunities can be found thanks to an increasingly global economic focus in Continental Europe, the United Kingdom, Japan and beyond.
This spring, the dollar started to show weakness as global investors became more willing to take on risk, according to Steven Englander, global head of the Group of 10 currency strategy at Citigroup Inc. “Risk appetite is improving as Greek risk diminishes; inflation expectations bounce back; and the fear trade is being unwound,” Englander explained in a note published this spring (though he may be rethinking the prospects for diminished Greek risk as June progresses).
Meanwhile, the historically weak euro is likely to get a boost as the European Central Bank carries out its quantitative easing program, announced in January. The ECB’s accommodative monetary policy and increasingly positive macroeconomic conditions should favor undervalued companies based in the European Union, says Oppenheimer Funds Chief Economist Jerry Webman.
“We think that as 2015 unfolds, the EU’s macroeconomic environment will begin to help competitively positioned companies domiciled in Europe realize their growth potential through productivity enhancements, savings in labor costs and increased access to capital,” states Webman in a white paper issued earlier this year.
Webman believes that investment opportunities in European equities have more to do with individual companies rather than the countries where they are headquartered. His position is backed up by a recent report from hedge fund firm Grantham Mayo van Otterloo. GMO asset-allocation team member Catherine LeGraw says her firm doesn’t bother to hedge its international-equity investments anymore because hedging, strangely, tends to increase portfolio risk under current market conditions.
Why? Because globalization has changed the currency exposure of most large-capitalization stocks, LeGraw says. “For example, roughly half of U.K. stock market capitalization is comprised of companies whose business has minimal exposure to the United Kingdom,” she writes.
Jeffrey Kleintop, chief global investment strategist for Charles Schwab & Co., says global investment diversification has paid off for U.S. investors this year—even after factoring in the dollar’s strong performance against weaker major currencies. Comparing global investment diversification to the Masters Golf Tournament, Kleintop believes that the world economy has changed to the point where growth can be found in every region.
“Markets have become increasingly globally diversified, requiring investors to adopt a global perspective. We’ve seen this trend in stocks mirrored nearly everywhere—even the Masters golf tournament. The geographic distribution of the home countries of the golfers at the [mid-April] Masters Tournament is almost exactly the same as the stocks in the MSCI All Country World Index,” he explains.
Current Bright Spots
Admittedly, strong dollar appreciation had (until recently) tempered the outcome for U.S. investors, as most global equity markets produced positive results in local currency terms in the first quarter of 2015, say Thornburg Global Opportunities portfolio managers Brian McMahon and W. Vinson Walden. But with the improvement of European economic data, the Eurozone became a bright spot even in U.S. dollar terms, with the Dow Jones Euro Stoxx 50 Index up 4.6% in Q1, according to McMamon and Walden’s April market commentary.
Mirroring Kleintop’s view of broad-based global growth, the fund managers note: “From an industry sector perspective, eight of the 10 sectors of the MSCI All-Country World Index delivered positive returns, with a range of negative 4.9% (utilities) to 8.3% (health care).”