How important are those currency hedges?

Calls from macro-oriented stock-market strategists lately have resembled predictions for golf’s Ryder Cup: They’re either rooting for the U.S. or Europe.

Last week was the worst one of the year for European stocks as the euro firmed up against the dollar.

In the view of Goldman Sachs Group Inc. and Roubini Global Economics, those moves were anomalies and the shared currency should continue weakening and benefit the region’s stocks.

Fund managers who invest globally should put on some currency hedges and overweight Japan and Europe while underweighting the U.S., advise Goldman Sachs strategists led by David Kostin. They predict 11 percent gains for Japan’s Topix Index and the Stoxx Europe 600 Index in 12 months, while they see the Standard & Poor’s 500 Index barely budging to 2,125.

How important are those currency hedges? Well, Goldman sees the euro and yen weakening 15 percent and 9 percent respectively over the next 12 months, meaning those equity gains in dollar terms would only be 2 percent for the Topix and -4 percent for the Stoxx 600. So a simpler way to act on Goldman’s advice might be to just short the euro and yen.
Parity Prediction

As for Roubini Global Economics, senior equity strategist Ibrahim Gassambe believes the euro’s recent rebound versus the dollar was a result of lower-than-estimated growth in the U.S. economy and the shared currency will weaken in coming months, eventually moving toward parity by the end of 2016.

The continuing decline of the euro should benefit stock markets of more export-oriented countries, according to Gassambe, so that means focusing on Germany and Italy. However, once the euro stabilizes, he wrote, domestic activity will come into focus and that means Spain should outperform Italy in the medium term.

We’ll have to wait until the fall of 2016 for the next Ryder Cup between teams of the best American and European golfers. It will take place at Hazeltine National Golf Club in Chaska, Minnesota. That course, however, is famous for being the spot where the South Korean Y.E. Yang whupped American Tiger Woods and European Padraig Harrington to become the first Asian male to win a major golf championship.