Category: Europe

03
May

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...
14
Sep

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.

2956-CLS-9/14/2017   

24
Jun

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.

 

1824-CLS-6/24/2016

04
Aug

Grexhausting

Content provided by Grant Engelbart, CFA, CLS Portfolio Manager As the market has seemingly put the Greek crisis behind it for a couple of weeks, I might as well bring it back up!  The media certainly hasn’t let it go. Financial news is still enamored with Greece. The country, whose economy is the size of...
14
Jul

Market Horror Picture Show

By Kostya Etus, CLS Associate Portfolio Manager I love watching movies. It is one of my favorite things to do in my spare time. I really enjoy all types of movies, and I will give almost any film a chance except for one genre: horror. I find horror films typically do not have well-developed plots,...
08
Jul

Emerging Market Divergence

Content provided by Sierra Morris-Fuchs, CLS Investment Research Analyst Emerging markets have shown favorable valuations and stronger global growth prospects recently, which have presented intriguing opportunities. But lumping these markets together as a single country or region can be quite deceiving. Instead, the emerging markets should be analyzed individually because their characteristics vary widely —...
15
Jun

Interest Rate Hike – The Waiting Game

Content provided by J.J. Schenkelberg, CFA, CLS Senior Portfolio Manager I think we have all experienced this at some point: We go to the store, proceed to the checkout counter, and face the daunting choice of which line to enter. We pick one and stand there waiting in uncertainty. Every movement begs the question: Should...
11
Mar

Q & A with CLS Portfolio Managers

How worried should investors be about the tension in Ukraine and Russia? Scott Kubie, CFA, CLS Chief Strategist The overthrow of the pro-Russian government in Ukraine and the subsequent intervention by Russia in select parts of Ukraine has been unsettling. I believe the events should worry investors a little, but not too much for the...
28
Feb

Big Growth in Little Europe

Content provided by Grant Engelbart, CLS Portfolio Manager Our interest in Europe is no secret. Attractive valuations in the Eurozone and other international markets make a compelling argument to invest abroad, but what about growth?  A great way to invest more granularly in the European recovery is through small caps. While small cap earnings growth...
05
Sep

International on its Way Up

Content provided by  Rui Wang, CLS Research/Portfolio Analyst  Investors are always looking for a deal, or the best value available. This is the key to being a successful investor, and is also the most challenging element to investing. CLS feels that international emerging markets are poised for a take-off and are one of the best...