(Bloomberg) -- Love the currency, hate the stocks. Thanks to a strong exchange rate, clouds are once again gathering over European equities.
That’s because the euro’s appreciation to an almost three-year high could mean overseas earnings lose some of their shine after conversion. Each 10 percent gain in the euro trims about 6 percent off earnings per share, Credit Suisse Group AG estimated last week. While the euro rally took a breather Monday amid weakening economic data, there’s good reason to believe it still has legs, with the region expected to finally catch up with the U.S. in monetary tightening.
But a strong euro doesn’t have to be all bad for investors in European stocks, especially if recent softness in economic data proves little more than a temporary blip. For dollar investors, euro strength gives returns an extra boost when translated back into the greenback. Domestic industries in Europe -- typically found among mid- and small-caps and in peripheral countries -- are also more shielded from exposure to global trade tensions and euro strength.
European periphery tends to outperform with a stronger euro, Credit Suisse analysts led by Andrew Garthwaite wrote in a note last week. For instance, 56 percent of Spain’s market value comes from the most domestically focused sectors, compared with only 15 percent for France, the bank said.
And for dollar investors, even hedging euro moves with one-year forwards returns 3.1 percent currently. Those even more bullish on the euro can go unhedged, potentially earning an even larger windfall.
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