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How To Think About European Equities Amid Currency Volatility

By Kurt Osterberg · On April 6, 2018

One of the most interesting (and surprising) results of 2017 was the magnitude of the strength of the euro against the U.S. dollar. The greater than 14% appreciation that was observed represented the best performance of any of the G10 currencies against the U.S. dollar during that period.1

So, as we enter the end of the first quarter of 2018, have any new trends come to light, or has the U.S. dollar largely continued to weaken? The answer thus far looks like the trend of dollar weakness remains intact, but that the yen and the Norwegian krone have taken over as the strongest currencies, with the euro in the middle of the pack.

Trends of the G10: Dollar Weakness but Shifting Leadership Has Been the Rule from 2017 to 2018

Translating Currency Moves into Equity Performance

No one can say exactly what will happen with the U.S. dollar (or any other currency) ahead of time. We can, however, utilize WisdomTree’s extensive European equity toolkit to see if any stories emerge about underlying drivers of European equities. These drivers could offer insight into where opportunities may be for 2018 and beyond.

2017 Was the Year of Unhedged Strategies: This is difficult to forecast, but strong performance in 2017 came from exposure to European currencies appreciating against the U.S. dollar.

2017 Was the Year of Domestic Strategies: WisdomTree’s two strategies most focused on European equities with domestic revenue streams—theWisdomTree Europe Domestic Economy and the WisdomTree Europe SmallCap Dividend Indexes—also did very well in 2017. This makes sense for two reasons. First, they did not face the headwinds that came from having significant exports as European currencies appreciated. Second, 2017 was also characterized by robust improvements in sentiment and economic growth expectations WITHIN Europe, and these strategies were heavily exposed to the cyclical sectors that benefited the most.