A Hedged Bet on a European Bull Market

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Both U.S. and global markets bounced strongly last week. The S&P 500 was up 3.03%, the Dow Jones rose 3.84% and the Nasdaq jumped 2.35%. Emerging markets also joined the party, rising 2.05%.

Big gainers in your Bull Market Alert portfolio included The Bank of Ireland (IRE) jumping 11.28%, Euronet Worldwide (EEFT) rising 3.90%, MasterCard (MA) adding 2.60% and the Rubicon Project, Inc. (RUBI) gaining 1.97%.

This week’s Bull Market Alert recommendation takes you away from the range-bound U.S. stock market to European stock markets, which have already gained close to double-digit percentages this year.

Even as the S&P 500 has been flat this year, the WisdomTree Europe Hedged Equity Fund (HEDJ) is up 9.33% so far in 2015.

And here’s why I expect this broad-based bet on Europe to outperform U.S. stocks in the coming months.

First, European stocks are cheaper than their U.S. rivals. Based on the long-term cyclically adjusted price/earnings (P/E) ratios, European stocks currently trade at nearly a 40% discount to U.S. stocks. That means European stocks have not been this cheap relative to the U.S. market going back to 1979, when Jimmy Carter occupied the White House.

Second, European corporate earnings are expected to grow by 10-12% in 2015. That compares to 6% to 8% growth in the United States. This marks the first time since 2008 that European companies have outpaced their U.S. counterparts by this measure.

Third, the European Central Bank (ECB) announced in mid-January that it plans to launch a quantitative easing (QE) program by spending over €1 trillion buying bonds. And as you may know, both the U.S. and Japanese stock markets soared in tandem with the launch of their respective QE programs. That’s because as extra QE funds get recycled in the economy, prices of assets like stocks and property get bid up.

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Fourth, QE weakens the euro. And a weaker euro is a big boost to the stocks of export-oriented European companies. It makes European exports more competitive and boosts corporate revenues in euro terms.

At the same time, as a U.S. dollar investor, you need to be hedged against the weak euro to keep your profits from evaporating when they are converted back to U.S. dollars.

As the name implies, the WisdomTree Europe Hedged Equity Fund (HEDJ) hedges out this euro currency risk. This ETF also focuses on European companies worth more than $1 billion that generate at least half of their revenue outside of Europe — revenues boosted by a weak euro.

So buy the WisdomTree Europe Hedged Equity Fund (HEDJ) at market today, and place your stop at $53.50.

I am going to hold off on recommending an option on this one until we get a better technical set-up.

Portfolio Update

The Bank of Ireland (IRE) jumped 11.28% last week. After it was pushed lower on news of its ADR being delisted from the NYSE, IRE enjoyed a strong comeback rally last week after the significant overselling. I’m still researching what I will be recommending that you do with this position before it de-lists. IRE remains a HOLD.

WisdomTree Japan Hedged Equity ETF (DXJ) gained 2.58%. WisdomTree CEO Jonathan Steinberg did an interview on CNBC last week and commented on the extraordinary growth and strength surrounding his company’s hedged exchange-traded funds and cited DXJ specifically. DXJ has been on the rise in recent weeks and just surpassed the mighty 200-day moving average (MA) last Thursday after two previous attempts this year. DXJ is a HOLD.

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Euronet Worldwide (EEFT) rose 3.90% over the past five trading days. EEFT will report earnings on Wednesday, before markets open. Euronet’s stock just bounced off the significant $45.00 support level and moved higher. Currently 21% below its 52-week high, EEFT has plenty of room to run if its earnings report is positive. EEFT is a HOLD.

The Rubicon Project, Inc. (RUBI) gained 1.97% after falling early in the week. RUBI jumped 5.76% on Thursday alone, giving it the distinction of being the largest daily gainer on the Russell 2000 index. RUBI is a HOLD.

MasterCard (MA) rose 2.60% on the heels of its positive earnings report from the week prior. Although MA did breach above its 50-day moving average on Thursday, it slipped back beneath on Friday to remain a HOLD.

HDFC Bank Ltd. (HDB) had a quiet week, trading down just 0.12%. Standard & Poor’s affirmed its “BBB-” long-term and “A-3” short-term credit ratings for HDB last week. S&P also highlighted HDB’s recent injection of $1.5 billion in new capital and forecasts this will positively impact the bank’s long-term financial position and credit profile stability. HDB is a BUY.

Latest Special Report

As a courtesy, I want to bring to your attention the newest version of The Top 12 Stocks for 2015, which features three of my top investment recommendations, as well as bonus picks from each of my fellow investment newsletter editors at Eagle. This report and others are available FREE on my website to you.

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Nicholas Vardy


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