How to take advantage of a weak euro in our investment in stocks

The euro has plummeted 10% against the dollar this year due to a weak economy, the energy crisis, and the Russian invasion. This, while the Federal Reserve's aggressive interest rate hike campaign has given the US dollar a new boost. This caused currencies to level off last week for the first time in 20 years. This could create new winners (and losers...) in stock investing.

What does the weakness of the euro mean for the profits of investing in European stocks?📊​

Investing in shares of the main European stock index, the STOXX 600, make 24% of their sales in North America.

Since these dollar sales are worth more when converted to a weak euro, this weakness is positive for the returns on investing in European stocks all things being equal. In fact, Goldman Sachs estimates that every 10% drop in the euro against the dollar adds about 2,5 percentage points to the profits of investing in European stocks.

What does this mean for European stock investment prices?​🌡️​

Oddly enough, investments in European stocks have historically performed better when the euro has risen in value, not when it has fallen. This is because investors tend to view it as a "risky" currency. Basically, the opposite of a safe haven like the dollar or gold. Therefore, when economic growth slows, this risk outweighs the potential reward of improved earnings from these companies. However, this year there have been some returns that outperformed the euro's decline. Investments in European stocks with U.S. sales have outperformed investments in domestic stocks by more than 10%.

Investment in shares of companies focused on the domestic market usually fall along with the euro. Therefore, the fall in value of the currency reflects a loss of confidence in the economic growth of the region. It will naturally impact the fundamentals of investing in European stocks. By contrast, investing in stocks that do most of their business outside Europe has seen analysts raise their earnings estimates for next year. A weaker euro will increase the cost of imported products. But those that can partially offset this with higher-value sales abroad should be better positioned to improve their results.

How do we take advantage of this stock investment opportunity?🛒​

Taking into account the above, it makes sense to increase our positions in investing in European stocks with income from abroad and move away from those with mainly domestic income. As for investing in stocks with higher profits from abroad, the means of Communication (51%), healthcare (39%) and consumer staples, especially food, beverages and tobacco (31%) have the greatest exposure to North American sales. They also have exposure to sales in Europe below average, between 26-29% (the average is 42%). There are countless exchange-traded funds that follow these sectors, such as iShares STOXX Europe 600 Media UCITS (EXH6), the iShares STOXX Europe 600 Food & Beverage UCITS ETF (EXH3) or the iShares STOXX Europe 600 Health Care UCITS ETF (EXV4).

For investing in European stocks with higher profits coming from the region, the leisure, travel and retail sectors make an average of 60% of their sales in the region. And since their costs tend to be paid in dollars, they will feel the euro's weakness more acutely than most. If we are adjusting our portfolios to benefit from currency swings, it might be worth avoiding these sectors in the short term. That said, it wouldn't hurt to analyze the sales exposure of our investment portfolio in European stocks so that Do not take us by surprise with the quarterly results. We can find a company's sales exposure by Googling the company name followed by "investor relations" to find its corporate website. Then we go to the company's latest annual report (probably in a section marked "presentations," "earnings releases," or "annual reports") and look for "geography" in the report. In most cases, we will find the breakdown of the company's sales by region or country.