Dear Eoin, I may not be the only Europe-based investor who is currently facing the following dilemma. My income and expenditure are both in Euros. I have protected and increased my wealth and income by investing in USA stocks which have given me both capital appreciation and currency increase. Now the USA dollar looks over-valued and all equity options appear to be unfavourable. In addition, inflation is high and so holding liquidity means losing real spending power. What are the alternatives on offer?

Eoin Treacy's view

Thank you for this question which touches on a topic everyone has an interest in at present. Inflation has been described as the thief which comes in the night, but lately it feels like bandits are roaming around the house in broad daylight.

The Dollar remains in a consistent uptrend relative the Euro. Parity is a big psychological level, and the Euro did revive for a few days. However, the Fed’s determination to raise rates vastly outweighs that of the ECB. Therefore, it stands to reason the Dollar will continue to outperform until the Fed stops raising rates. I don’t want to pre-empt that event because the trend still looks consistent and therefore should be given the benefit of the doubt.  

Wall Street could easily eat up any gain one gets from the currency differential. Tighter financial conditions weigh particularly heavily on the companies which rely on cheap credit to fund their operations. Meanwhile about 30% of S&P500 earnings are international so the Dollar will not help the largest companies. Even the dividend aristocrats are not immune from selling pressure in a bear market.

Near cash items like the Vanguard Fed Money Market fund now yield 2.16%. It’s not going to protect you from inflation but with the depreciation of the currency it certainly helps.

Any other solution implies taking on more risk. The emerging battery sector is exhibiting clear relative strength and are sound candidates for outperformance in future but small companies with little in the way of earnings struggle during recessions.

You could also choose to short indices. That’s my preferred personal strategy and I have also bought a group of out of the money puts on major companies as an insurance policy. However, both those solutions might be outside the comfort zone of many investors. 

Right now, we are in the lull between when monetary conditions tighten, and earnings begin to disappoint. Corporate profits are very likely close to a significant peak. This is not the time to swing for the fences. Adopting modest expectations at a time like this will prevent over exposure when selling pressure takes place in earnest.