After its biggest slide since being created in 1999, the euro is finding a floor. A torrent of money unleashed by the European Central Bank is fueling demand from US and other international investors for the region’s stocks – and the currency needed to buy them.
Global mutual funds and exchange-traded funds that focus on European equities attracted $63.6 billion this year through April 22, up 70 percent over the same period in 2014, according to data compiled by EPFR Global, Bloomberg reported.
Rather than a referendum on the outlook for growth in the eurozone, demand for the 19-nation currency reflects appetite from investors who want a piece of this year’s 19 percent rally in the region’s stocks.
“European equities went from being an incredibly unloved asset class to very fashionable almost overnight,” David Donabedian, the Atlanta-based chief investment officer at Atlantic Trust Private Wealth Management, which oversees $26.2 billion, said April 23. “In the short term, the euro will probably firm a bit more.”
Demand for the region’s equities has driven the Stoxx Europe 600 Index to a record since ECB President Mario Draghi announced his quantitative-easing plan on Jan. 22.
Unhedged Strategies
Some money managers are forgoing currency hedges on their European investments, Nomura Holdings Inc. analysts led by Jens Nordvig wrote in an April 17 note.
About 30 percent of the $25.5 billion channeled into US exchange-traded funds focused on European equities went into unhedged strategies, according to data compiled by Bloomberg. That $8 billion is about comparable to the entire amount that was invested in the same period of 2014 across both hedged and unhedged ETFs with a similar focus.
“If you’re a North American investor, we finally have QE, we finally have policy makers responding,” Susanne Alexandor, a senior member of the investment team at Cougar Global Investments Ltd., a Toronto-based investor in ETFs with $1.3 billion under management, said April 21.
Trading Band
After tumbling from almost $1.40 in May 2014, the euro is poised to rise in April for the first time in 10 months. It was at $1.0862 at 11:30 a.m. in Tokyo, up from $1.0731 at the end of March. Since March 6, it has closed in a five-cent trading band between $1.0496 and $1.0970.
Cash has exited the euro region as ECB bond-buying took debt securities out of the market, sending yields below zero. About 135 billion euros ($147 billion) flowed from the region into foreign portfolio assets in the last three months of 2014, according to Deutsche Bank AG, about 90 percent of which was attributable to fixed income.
While some of that money is returning to the continent’s stock markets, investors such as Philippe Brugere-Trelat of Franklin Templeton wonder whether that is enough to turn the tide for the shared currency.
