A frequent reader might have noticed by now that I’m a big fan of intermarket analyses. It is sometimes astonishing, how these studies reveal underlying strength and even create compelling pair-trading opportunities.
So here is an interesting pair: German stocks and the Euro. The German economy is one of the strongest, if not the strongest, economy in Europe. Smart labor market reforms in the last years as well as the dependency on exports to Asia are some of the success factors.
There has been a relatively strong correlation of the German ETF EWG to the Euro in the last years. However, stocks managed to decouple from the Euro in 2010 because of the strong fundamental factors mentioned above:
The relationship is not intuitive: German companies should benefit from a weaker Euro because of their dependency on exports. However, note that EWG is priced in Dollars, which changes the relationship a bit (Plotting the German DAX index would give you the same basic message, though).
In any case, note how EWG held up quite well in recent weeks despite the Euro drop:
The lower pane actually sketches a nice hedged play on this theme (“Germany outperforming the rest”): long EWG, short FXE would have yielded a nice 15% return while the German ETF alone would have rewarded you with just 7.5% with even larger drawdowns.
Currently; I’m waiting for weaker prices in order to get into EWG in the Covestor Model Portfolio.
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A young and savvy, yet experienced and accomplished investments mogul since ‘01; Michael has amassed a fortune as a private self investor. Recently starting his own successful blog and turning it in to a corporation — MIV Investments Inc., a company offering advice to thousands of people worldwide and attracting contracts from various reputable sources. His articles and publications have been linked to Forbes, CNN Money, Reuters, Bloomberg, and many other top worldwide mainstream media sources.
Michael Vlaicu
