Category: Europe


Reason to Invest Internationally #18: Wider Opportunity Set

Content Provided by Kostya Etus, CFA, Portfolio Manager As you may know, we have written a great whitepaper named “Why International: The Case for International Investing,” which highlights 17 reasons why investing internationally is ‘always’ a good idea, not just now when relative valuations are so attractive. Although 17 seems like a lot, I am...

Currencies’ Impact on Portfolios (and My Honeymoon)

Content provided by Joshua Jenkins, CFA, Portfolio Manager

Over the last year, currencies have been on the forefront of my mind, which is unusual. I’m not saying they are not important. In the short term, they definitely impact returns. Portfolio Manager Case Eichenberger recently wrote about that here. Over the long term, however, the impact of currency fluctuations tend to net out to zero. As long-term investors, we are generally comfortable taking on currency risk if the asset we are buying is priced attractively.

So, why have I been thinking about currencies so much? Well, my wife, Kirsten, and I were married this August, and immediately after the wedding we traveled to Europe for our honeymoon. While I may be a long-term investor, I am not a long-term honeymooner. Suffice it to say the recent dollar move definitely had an impact.

We did not choose Europe last fall specifically because the euro was trading at the weakest level to the dollar in 15 years, but believe me that fact did not go unnoticed by me. So, as I spent 2017 watching my trip becoming more and more expensive, it was painful. Fortunately, we locked in a substantial portion of the cost in April by prepaying for hotels and flights to various destinations in Europe. At least we were partially hedged.

(If you look closely, you can see me calculating how much more I had to pay for the gondola ride due to the euro rally. Just don’t tell Kirsten.)

The chart below provides some rough evidence that currency moves even out over time. During the last 50 years, rolling 12-month returns on the Dollar Spot Index (DXY) generally resemble a normal distribution with a return of 0.01% on average.

As Case’s blog pointed out, weakness in the dollar has provided a very nice tailwind for our international holdings at CLS this year. In addition, according to the table below from Ned Davis Research, when sentiment towards the dollar (red line) is as sour as it is today, the dollar typically continues to underperform to the tune of 5% to 8% per year. To put it another way, this tailwind may persist, and that should generally be a postive outcome for CLS portfolios.

So, if you are planning a trip overseas in the near future, some attention may be warranted. Perhaps hedging a portion of the expenditure ahead of time could be beneficial. Though I was better off having hedged, my experience tells me it does little to reduce the mental pain of the unhedged cost. For long-term investors, enjoy the tailwind while you have it. Just remember — honeymoons aside — the long-term impact of currency fluctuations doesn’t need to keep you up at night.



Brexit: Follow the Saying and Keep Calm….

Great Britain and EU, Brexit referendum concept

Content provided by Scott Kubie, CFA, CLS Chief Strategist and Rusty Vanneman, CFA, CLS Chief Portfolio Manager

British voters elected to leave the European Union (EU) yesterday. At market open, investors reacted swiftly to the news, pushing global markets sharply lower. The news came as a surprise. Betting markets and financial markets had moved in the direction of “Bremain” in recent days, exacerbating the losses experienced after the vote. The rally in recent days will raise the drama factor from today’s declines. International stocks were up 5% this week, through Thursday, and European stocks were up even more.

The only known result from Brexit is that we can expect more market volatility.  Economic uncertainty typically translates into market volatility.  And there is economic uncertainty with many views regarding what Brexit might mean from an economic standpoint.  Some do feel deep concern over spillover effects to global economic growth. Japanese stocks, for example, fell over concerns that global economic growth will push them into negative economic growth. Spanish stocks fell even earlier. For example, Santander, a Spanish bank, derives much of its profits from its British operations. A decline in Eurozone growth may also threaten the Spanish economic recovery under way. Some people, however, feel strongly that Brexit is a clear long-term economic positive for the U.K. economy. Only time will tell.

The CLS Portfolio Management (PM) team has already begun the process of combing through areas that dropped for potential value as well as looking for areas that may have risen excessively (bonds and the dollar). This process will be careful and disciplined, in contrast to today’s initial market reaction.

In Britain, the political dominoes have begun to fall. Prime Minister David Cameron resigned, clearing the way for a fellow Conservative who supported Brexit, (Boris Johnson is a likely candidate), to become the next prime minister. The vote is non-binding, meaning Parliament will need to pass laws expressing the wishes of the voters. Once those laws are passed, Britain and the EU will begin negotiations on the terms of exit. EU rules suggest an exit period of up to two years. A parting supporting economic growth is in the interest of citizens of Britain and the countries in the European Union.

Key points:

  • Much of the decline is just giving back gains earlier this week.
  • Our portfolios will likely lag today –giving back some relative performance from earlier in the week — because of drops in international stocks and currencies.
  • Fundamentals will likely change – but may take years to resolve.
  • The market often overreacts to political surprises more negatively (or positively) than they should.
  • Everyone in the exit process has an incentive to maintain economic growth.
  • CLS PMs are evaluating opportunities based on new prices using our disciplined process.