(Bloomberg) — A European stock trade that enamored global investors throughout 2015 and drew more money than practically anything else in equities is blowing up in peoples faces.
As the moves in thethe WisdomTree Europe Hedged Equity Fund show, the strategy of going long the regions shares while hedging to mute the euros swings is unraveling. Theexchange- traded fund has plunged a record 14 percent in December, erasing annual gains that swelled to as much as 23 percent in April and were still above 18 percent in July. Hit by withdrawals, its market value has fallen to $17 billion from more than $22 billion as recently as August.
Investors are pulling money from the fund like never before after Mario Draghis increase in European Central Bank stimulus failed to live up to expectations, triggering a decline in the regions stocks and a strengthening of its currency.
A lot of investors have been protecting themselves against a weaker euro, aiming for European equity returns which have been very strong this year as long as you hedged the euro, said Ewout van Schaick, head of multi-asset portfolios at NN Investment Partners in The Hague. His firm oversees180 billion euros ($198 billion). That story seems to be over after the recent central bank actions. Investorsare positive on European equities but are less sure it has to be on a hedged basis.
The funds popularity grew earlier this year, when its hedge became of paramount importance as the ECB started its bond-buying program, triggering a weakening of the euro to levels not seen since 2003 and a 22 percent surge in the regions stocks. In the first four months of the year, traders poured $13 billion in theETF, making it the favorite vehicle to bet on European equities.
Fast forward to December, and things dont look as good. The Euro Stoxx 50 Index is down 7.1 percent through yesterdays close, heading for its worst ending to a year since 2002, while the euro is set for its biggest monthly advance since April against the dollar.
Forecasters dont see the currency moving much from now. Itll weaken to $1.05 and stay at that level for the first three quarters of next year, before starting to rebound, according to projections. Its hovered around $1.09 for most of December.
That doesnt mean the consensus is turning bearish on European equities. Even without a significant weakening of the currency, strategists expect euro-area equities to climb another 12 percent by the end of next year, aided by a recovering economy, ECB stimulus and low valuations.The Euro Stoxx 50 rose 1.2 percent at 11:47 a.m. in London. At 14.2 times estimated earnings, companies on the gauge are cheaper than those on the Standard & Poors 500 Index or MSCI All-Country World Index.
We still believe in European equities, Van Schaick said. TheEuropean economic recovery is in the earlier stage, so all the lights are green for Europe. Theyre going to do a lot better than U.S. equities next year.