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.

This article was motivated by an article by Lawrence Hamtil [Ref 1]. The chart below illustrates this:

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 that buying European equities.

Ref 1.  Cycles, Sectors, and The Perils of Aggregated Data

If you found this article interesting, I invite you follow this blog via any of the methods below.

Subscribe via RSS or Email, or follow us on Twitter

If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY

Charting and backtesting program: Amibroker

Disclaimer

Technical and quantitative analysis of Dow-30 stocks and 30 popular ETFs is included in our Weekly Premium Report. Market signals for longer-term traders are offered by our premium Market Signals service. Mean-reversion signals for short-term SPY traders are provided in our Mean Reversion report.

Copyright Notice

This entry was posted in Asset Allocation and tagged , , , , . Bookmark the permalink.

Leave a Reply