Investing in European Stocks is a Forex Bet

Many financial advisers think that European stocks will outperform U.S. stocks. Evidently, they are talking about a forex bet.

The chart below shows the correlation between EZU and FXE:

The ratio of EZU/SPY rose until FXE reversed course when the financial crisis erupted. Since, this ratio has been on a downtrend and highly correlated to also falling EUR/USD. It is still early to call the recent rebound in the ratio a major trend reversal. Expectations of European equity outperformance are essentially forex bets, as the chart shows, i.e., bets that the EUR/USD currency pair will gain. Since no one can predict currency trends and especially in the medium-term, these expectations are mostly based on wishful thinking. They can turn out to be correct but that does not change this fact.

Anyone betting on European stocks outperforming U.S. stocks in the future is essentially a closet forex speculator and would be simpler to leverage a  EUR/USD long position rather than buying European equities.

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