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 than buying European equities.
If you found this article interesting, I invite you follow this blog via any of the methods below.
If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY
Charting and backtesting program: Amibroker
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.