‘Frexit’ Averted; How Should Investors Think about European Equities?
In a sign of the remarkable times in which we live, discussions of European equity investments in 2017 have often come with the caveat, “if there is still an EU.”
Last summer’s Brexit surprise seemed to make the prospect of an eventual EU breakup if not probable, at least possible. But with all eyes on France this month, voters overwhelmingly supported the candidacy of Emmanuel Macron, handing him a victory that has allowed pro-EU forces to “breathe a sigh of relief”, according to headlines too numerous to count. In the days following the French election, markets have been relatively sanguine.
Looking back at Brexit nearly a year later, it’s clear what a shock to the system that was, and how significantly many European markets suffered in the immediate aftermath. The FTSE 100 Index dropped approximately 8% the day of the Brexit news, while the French CAC 40 Index and German DAX saw declines of 10%.1 But a funny thing happened on the way to total anarchy… in the weeks that followed, every major European market rebounded, as did the Euro (though the British Pound is still off its pre-Brexit high, highlighting the often surprisingly divergent returns of foreign currencies versus the U.S. dollar). In fact, by year-end 2016, most major European indexes had not only rebounded from their Brexit-driven losses, but had significantly surpassed their pre-Brexit levels.
Uncertainty crept back in this year, as the French presidential campaign unfolded, but volatility remained mostly at bay. There is always the potential for another surprise lurking around the corner in Europe (next up, a June 8 election in the UK that Prime Minister Theresa May is hoping will position her with a “strong negotiating hand,” as Brexit negotiations begin in earnest2), but it still makes sense for a well-diversified equity portfolio to have exposure to European stocks. Just don’t overlook the U.S. dollar when looking overseas.
President Trump has mentioned on a few occasions since taking office that he’s in favor of a weaker dollar, and the USD remains off its highs from earlier this year. That being said, however, if global events of the past year have taught us anything, it’s that predicting elections or the actions of those elected is a difficult proposition. If you’re looking abroad for possible strong equity performance, know your options when it comes to adding in various hedges.
1. Bloomberg, as of 5/15/17.
2. Independent, “Theresa May dismisses David Cameron’s ‘extreme Brexit’ warning”, 5/11/17.
All investments are subject to market risk and will fluctuate in value. Past performance is not indicative of future results. An investment can’t be made in an index.
The CAC 40 (Cotation Assistée en Continu) Index is a French stock market index that tracks the 40 largest French stocks based on market capitalization on the Paris Bourse (stock exchange).
The FTSE 100 Index is an index that measures the performance of the shares of the 100 largest companies listed on the London Stock Exchange. It measures the daily share price performance of those 100 firms.
The German DAX is a stock index that represents 30 of the largest and most liquid German companies that trade on the Frankfurt Exchange.
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