uploads///European Stocks Have Surged Partly Because of a Weaker Euro

How a Weaker Euro Helps European Stocks

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Although the stronger dollar-to-euro exchange hurts the earnings of some U.S.-based exporters, it should be a tailwind for European companies. It translates into cheaper exports for them, particularly those companies that are cyclical in nature and can take advantage of growing U.S. demand for its products.

And Germany in particular, as Europe’s largest economy and fifth largest exporter to the U.S., could benefit significantly. Its major exports are cars and pharmaceuticals, two sectors which could see increased sales as our economy improves.

The weaker euro could, therefore, provide a direct boost to the earnings-per-share of export-oriented companies. This can occur because the exchange rates are baked into top-line revenues—something that many analysts may have overlooked because of the speed of the currency move.

Weaker euro helps European stocks as exports look attractive.

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Market Realist – Weaker euro helps European stocks as exports look attractive.

European stocks (FEZ) have benefited from the weak euro. Not only do exports look attractive to Americans, the large-cap European companies also gain from currency translation.

This is the exact opposite for US stocks. The stronger dollar (UUP) has led to large cap (SPY) underperformance compared with small caps (IWM). This is because small caps are more focused in the US, and they do not have to contend with currency translation losses like US large caps.

The graph above compares the stock performances of Bayerische Motoren Werke (or BMW), Daimler (DDAIF), and Seimens (SIEGY) since May 2014, when the dollar started appreciating against the euro. All three companies are German, the first two being massive auto companies and the third being a conglomerate.

BMW has given returns of 30.1% in that period. Daimler did even better, with returns of 32.2%. However, Siemens has lagged behind with returns of 8.6%.

These returns are mainly due to the relative attractiveness of European exports to American citizens, due to the weaker euro. Also, as mentioned above, currency translation gains have added to the attractiveness of European stocks.

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