Fitzsimmons: Euro Hedged ETFs Enticing For 2015

December 09, 2014

Brendan Fitzsimmons is head strategist at Medley Global Advisors, a global macro research and advisory firm based out of New York. The firm is part of the Financial Times' media empire, and is run by the former editor of Lex, the FT's incisive investment column. Medley Global's goal is to tap into FT's full reach of the world's leading policymakers, government officials and investment experts for insights that will be valuable to the world's top hedge funds, institutional investors and asset managers.

Fitzsimmons sat down with to discuss the recent plunge in oil prices and beneficiaries of cheaper oil. He tells us what he expects from the eurozone's central bank in the coming months and what it means for European equities. Finally, he tells us which asset classes look ripe heading into 2015. I want to get your thoughts on the recent plunge in oil prices. Which markets will benefit most from lower oil prices?
Brendan Fitzsimmons: Obviously the opportunities lie in a macro sense with those countries that have suffered or tended to suffer the most when we've had the bouts of the opposite—higher oil prices. Particularly those that have a high component for food and energy, but particularly for energy in the Consumer Price Index (CPI) baskets and where that then has tended to impinge on the maneuverability of their central banks in their ability to ease rates or, at times, to force them to hike rates that they would not otherwise have sought to do.

Certainly in the emerging markets space, that's the case. To drill down further, there are some countries that have also taken the initiative, in many cases out of necessity, from a fiscal standpoint, to reduce subsidies. You now have a situation where the political pain for having reduced some of those subsidies is not as bad in the context of the lower input cost. So Indonesia and India are ones that have certainly caught attention.

But I think in general, in the emerging markets space, the consumers of commodities and particularly of energy importing are beneficiaries. Now, you then have to scan that against other factors like idiosyncratic factors—where are they in their growth cycle, where are they in terms of policy maneuverability and the recent stance. The European Central Bank (ECB) just announced today [Dec. 4, 2014] that in Q1 they will to start looking at additional stimulus. In the coming months, do you expect a "bazooka" in the form of bond buying from the ECB?
Fitzsimmons: It's certainly going to be on the table. It's not so much a bazooka, but the critical takeaway is that the directionality of policy continues to gain momentum beyond the bounds of the current programs. Already, the current structure was seen as an unconventional mix that was unlikely to be seen as soon as it was seen in the elaboration from September and the actual purchases of covered bonds in October, the purchases of [asset-backed securities (ABS)] in the last two weeks, and in the [targeted longer-term refinancing operations]—the first one in September and the second one that comes next week.

If you had said to people that they would potentially be considering private asset purchases to expand the balance sheet and/or direct purchases of sovereign bonds as soon as the first quarter, that would have been surprising. Today there was some disappointment that there wasn't more specific clarity. But the overall directionality has been clear and continues to advance faster than what was previously anticipated. We do think the first quarter is prepping for additional policy. It's just that, unlike more unitary institutions, the structure acts as a challenge to the swiftest, most dramatic action from the leader of the institution.

But on the basis of these negative revisions in the quarterly projections that we got today, and in the context of the risks to market pricing of inflation expectations and the downgrade of the prospects for the economic cycle, the case is building. What does that mean for eurozone equities? What is your view on eurozone equities in the coming quarter?
Fitzsimmons: To the extent Draghi is able to marshal the consensus on the basis of these new projections and on the basis of the necessity to expand the current instruments—he's talked about size, pace and composition—it's likely that those all will need to be increased in order to fulfill their fundamental objective, which is a price stability mandate, which these projections are reinforcing their distance below and away in time. As you move through the first quarter, you'll be reaching a point at which they're going to start showing forecasts for 2017. To the extent that these reinforce that you're not going to see an attaining of the near-2 percent [Harmonized Index of Consumer Prices] number, it gives him the basis for moving forward.

On that basis, it is ultimately supportive of European equities in terms of getting more stimulus, and benefiting on other factors that have played out. Less than six months ago, we were at 140 on the currency. You're talking about sub-125, even with the bounce today in dollar/euro. You're talking about yields that are materially lower, including new lows, even with some bounces today. In the periphery, you're talking about Spain; Italy dropped below 2; Spain, Italy and Portugal at new lows. Obviously, bunds have stayed below 1 percent.

So you're at a lower refinancing level. You're at a more competitive exchange rate. You're in a situation where you have the potential for this additional stimulus, in addition to what they're doing on the ABS side, which is in facilitating the financing for the banks, which have just now come out of the stress tests. So that uncertainty of the stress tests, of the [asset quality review], has now been put in the rearview mirror.

There is a case for a positive outlook. You've seen this, for example, in the ETF universe, the attention to the inflows to currency-hedged exposure to Europe for non-European investors, particularly for U.S. investors. That's likely to continue apace. The appetite for the currency hedge will probably still be there because there's nothing coming out of the ECB that is working against further depreciation in the euro. In fact it's welcomed, even though it's not specifically targeted.

Within Europe, there's no question that part of the whole portfolio rebalancing effect of a QE program was that it's with the foreknowledge that it's going to have an impact in incentivizing attention to higher-yielding assets, including specifically equities, and particularly in those countries, in those industries that benefit the most from growth in the U.S., a more competitive exchange rate, lower energy prices.

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