In light of record-breaking moves over the past two years, many people intuitively recognize that the U.S. equities sector, despite it being billed as the “best house in the worst block,” lacks the probability of providing high returns over the foreseeable future. However, geopolitical instability, particularly the catalysis of another Cold War with Russia, has left investors with few viable options. Outside of acquisitions in physical safe-haven assets, are opportunities abroad a realistic alternative within the context of this current economic paradigm?
In answering this question, we will examine the case of the Eurozone, specifically the German large-capitalization equity markets. With a gross domestic product north of $3.7 trillion (as cited by the United Nations Statistics Division), Germany is easily the European Union’s strongest economic contributor. And with a rapidly eroding Euro currency which has lost in excess of seven-percent of valuation over the past 30 days, the resultant inflationary pressure should be supportive of nominally higher equity valuations. Thus, exchange traded funds that track the performance of the DAX, or the German equivalent of the S&P 500, would in theory be amongst the hottest trends for this year.
Unfortunately, the scientific and technical data present an ambiguous forecast. Using a scatterplot analysis to chart daily performance figures for the DAX, the distribution of percentage moves over the past 60 days has been widely dispersed. What this suggests is that trading behavior has become more erratic in recent sessions, an understandable reaction given the radical shifts in the fundamentals. However, it is worrying that the frequency and density of trading behavior was more centralized during the first half of the final quarter of 2014 than it is now. Empirically, there has been a transition from rationality into irrationality with traders operating all over the board, all of them speculating towards extreme swings in trajectory. While that would necessarily mean that those speculators who guess right will be handsomely rewarded, the DAX index has taken on the shape of a binomial options vehicle, an all-or-nothing affair.
The price chart of the DAX itself doesn’t reveal much in the way of forecasting. While the jump in mid-January can be attributed to the devaluation of the Euro, that is the only logical explanation for the sudden bullish sentiment. Worse yet, the “ROI” from the artificially weakened currency is relatively poor: since October 1st, 2014, the Euro has lost 10.27-percent whereas the DAX has gained 14.45-percent. Although the positive trajectory in the DAX is nothing to scoff at, major currencies like the Euro rarely make large swings in such a short time horizon. In other words, the reward of a higher market capitalization is nowhere near the risks of potential monetary misalignment. Additionally, if the majority of German traders believed that the recently announced accommodation strategy by the European Central Bank was a constructive development, market sentiment would not be as dispersed as it currently is.
Given the entire context, smart money investors will likely wait out the volatility in international markets until some base of stability can be reached.