The thesis that a stronger euro is bad for European equities isn’t as clear-cut as many in the investment community believe.
That’s the message from Goldman Sachs Group Inc., which says that a solid global economic backdrop can outweigh the threat that gains in the shared currency pose for earnings in the euro zone. While investors are starting to worry about the extent to which the euro will weigh on the region’s exporters, Goldman’s Christian Mueller-Glissmann says the currency’s advance doesn’t completely change the case for European equities.
“It’s possible that the strong euro weighs on the export side, but as long as global growth is solid, that’s the more important factor,” Mueller-Glissmann, a London-based managing director of portfolio strategy and asset allocation, said in an interview. “And that’s why the market can shrug off the stronger euro. This whole idea about a higher euro being bad for exporters has quite a few things you can poke at.”
After years of weakness that boosted the region’s exporters amid unprecedented monetary stimulus, the euro is this year’s top performer among G-10 currencies after the Swedish krona, lifted by better economic data and expectations the European Central Bank will begin to roll back support this autumn. The euro area’s equities and currency have been moving mostly in opposite directions this month, a relationship that harms the outlook for exporters, just as earnings revisions for the region have turned negative.
Members of the Stoxx Europe 600 Index get about half their revenue from outside the region, according to estimates by JPMorgan Chase & Co. Automakers, among the biggest winners in the stock market between Mario Draghi’s 2012 pledge to preserve the euro and the end of last year, have been singled out as particularly vulnerable.
There are exceptions, Mueller-Glissmann said: many European car manufacturers have both their costs and revenue abroad and are proactively hedging for the currency impact, limiting some of their losses. While the euro’s strength will hit those European companies whose costs are local, it may not necessarily hurt large caps that are domiciled in the region but produce elsewhere, he said.
The strategist acknowledged the euro has been weighing on investor sentiment. It’s part of the reason his team last week moved to a neutral rating on European stocks over a three-month horizon. They remain overweight the region over a period of 12 months.
“The strong euro reflects this synchronized global recovery and the idea that the U.S. is not the only strong economy in town, which benefits Europe more than other places because it’s an export-oriented market,” Mueller-Glissmann said. “If you are a long-run investor, you can still have a good case for Europe to continue to catch up with the U.S. a bit through the end of the year.”