0

I understand that usually is not a good idea to allocate the majority of your assets in international investments due to currency risk.

Still, when I look at the Euro Stoxx 50 it seems that it's far worse than the S&P 500.

I know that it's a bad idea to judge the future returns of an index only by its past returns, but that's not my only criteria.

I'm aware that in Europe taxes and regulations are far higher than in the US. In addition, there is no political stability and the welfare state seems to basically kill the economy. In addition, now we have the brexit.

All the above reasons make me thing that the EU market will never (at least I won't see it) have a growth at least similar to the S&P 500.

My question is what are the arguments to say that, for a long term investment strategy (10+ years): the currency risk that involves investing in some S&P 500 fund/ETF in euros is lower (or higher) than the risk that the Euro Stoxx 50 involves by itself.

Note: When I say risk, I'm not referring to risk of losing money, I mean to earn much less. My investing interests are long term (more than 10 years), so I'm not concerned about short-term volatility. I'm trying to determine which strategy is more defensive/sensible.

Improve this question
1
  • Why do you want to invest in Europe at all if you have such a negative view on it?
    – user102802
    Commented Dec 10, 2020 at 23:19

1 Answer 1

Reset to default
4

Large companies are multi-nationals such that it really doesn't matter where they are based. But the European banks have large operations in Europe and are currently hurt by zero interest rates.

Otherwise, the EUR, with the zero interest rates, tends to support European economic activity. The USD at 1.75% interest rate is more of an income opportunity. In other words, selling the EUR/USD currency pair realizes rollover interest, at about 1%, on the leveraged amount. But also, the USD at 1.75% interest might represent the difficulty of financing the government budget.

Now consider a viewpoint that the largest companies in the S&P 500 are over-hyped and that European companies have a more reasonable buy-in pricing. Also, much of the gain in the S&P 500 is due to a few of the largest companies. In the long-term I would expect the S&P 500 and the Euro Stoxx 50 to have similar results.

Basically, the investor should invest in what they are interested-in.

Improve this answer
2
  • In other words, selling the EUR/USD currency pair realizes rollover interest, at about 1%, on the leveraged amount. Please could you explain that deeply?
    – Martel
    Commented Feb 7, 2020 at 16:05
  • Well for instance, a margin deposit of 5000 will hold a leveraged forex currency position of 25000 at 5x leverage. A sell of the EUR/USD is a sell of the EUR and a buy of the USD. The difference in interest rates is 1.75% for the USD minus 0% for the EUR. But there is a brokerage commission on the rollover interest such that the rollover interest is probably about 1%. That's 1% annually of the 25000 or 250. But if the investor is holding EUR then a sell of the EUR/USD is a hedge of the EUR.
    – S Spring
    Commented Feb 7, 2020 at 22:44

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .