Why The Strong Euro Does Not (Yet) Bother Me And Why I Stick To My Cash Flow Approach

Some readers have written to me and asked how I think about the euro’s development and its strength. They fear that a strong euro will harm their dividend strategy. And indeed, the euro’s value has risen enormously and is now as high as it was in 2018.  This naturally affects my portfolio. Not only are US companies losing value for me, but I now receive fewer dividends from them than a year ago. Since you’ve asked, I will show you in the following article why I remain calm and do not panic.

Key takeaways:

  • A strong euro or weak USD have different effects on your portfolio. Some are good for you, some are bad. A strong euro will melt your USD dividends. Conversely, you can buy US companies cheaply.
  • For once, it is good to diversify your portfolio geographically. Even though US companies are often more interesting than European companies because of their dividend policy, I would never invest in the US alone. There are as many European champions, such as Logitech, SAP, LVMH, Henkel, Reckitt Benckiser, Mayr-Melnhof, or Inditex. The Asian region is also interesting. The Chinese companies Tencent or Alibaba have performed excellently. Tencent is also part of my retirement portfolio. And there are also great companies slumbering in Japan. Warren Buffett recently made some big purchases there.
  • It also makes sense to invest for a long time. With this method, you can take advantage of the cost-average effect. This effect makes sure that you can flatten out extreme effects that can occur from time to time.
  • You can easily achieve both aspects with an ETF savings plan. That way, you invest all over the world. Furthermore, you invest over a longer period of time. So you don’t even have to do stock-picking. You also don’t need to deal extensively with your companies.

Why is the euro so strong?

Just a few months ago, some economists saw EUR/USD approaching par in Q3 2020 before reaching a low of 0.98 in early 2021. Well, now we are in the third quarter, and the EUR only knows one direction. There are many reasons for this, which together form a fairly strong foundation for the European currency.

So-called Eurobonds

One reason for the strong euro is that, for the first time, the European Union can borrow on the financial market, and the member states are liable for it (EU).  There are plenty of US bonds (treasuries), and they are still considered absolutely safe. In Europe, however, there have so far only been bonds issued by individual nations. Besides, investors have always been afraid that the euro as a currency would collapse together with the European Union. But recent EU decisions changed that. These decisions stipulate that the EU Commission can finance itself through its own financial instruments (so-called Eurobonds). This change, already referred to as a game-changer, means that investors can now also invest in the European Union and thus have a fairly good alternative to Treasuries, Gilts (United Kingdom), or JGBs (Japan). Furthermore, the decreasing interest rate gap between USD and Euro has also made the Euro more attractive.

Europe as a safe harbor?

There are many skeptics about the European Union and the European currency. But one reason for the strong euro is that many investors see Europe as a safe harbor. Not even an excellent European policy is necessarily responsible for this. Rather, many investors seem to believe that Europe is currently responding better to global crises and is better positioned for the future than other countries. I don’t want to evaluate this aspect personally, since everyone here has a different opinion anyway. It also doesn’t matter what you think about this question as long as most market participants have this opinion.

How far will the euro increase in value?

I cannot answer this question either. Unfortunately, I do not have a time machine, and I think it is completely wrong to make predictions. I am only a simple private investor. 😉 What has to be said is that the euro has not had any major developments in the exchange reserves. This could now change and actually further fuel the value. But perhaps this scenario is already priced in. I think we’ll see what happens here. There is not much we can do as we do not influence further development.

World official foreign exchange reserves by currency
World official foreign exchange reserves by currency (Source: COFER/IMF)

Why the strong euro feels so bad for European investors

Nevertheless, there are some negative aspects for European investors that hurt. This is because the strong euro affects European companies’ performance and the prices of shares traded in other currencies. Dividends from foreign companies are also negatively affected.

The impact on European companies

Especially export-dependent companies that do business worldwide, but have their headquarters in Europe, are experiencing challenging times. The more powerful the euro becomes, the lower the revenues from the USD area. But the production costs that arise in the eurozone weigh much more. With the strong euro, products may no longer be competitive on the market. For example, an American company has to pay much lower wages because it pays its workers in USD. Accordingly, companies must hedge against currency fluctuations. One possibility is to use financial instruments, e.g., financial or currency hedging, limiting the impact of foreign exchange risk. But such instruments cost companies a lot of money (the banks are happy the other way round).

Another option is natural hedging. This means that companies relocate production to where their customers are located. BASF or Siemens, for example, have production plants located worldwide as a result of acquisitions or investments. For example, BASF and Siemens no longer have to produce in Europe, where they would have to pay workers in euros, which would increase the price of the products and services.

The impact on US equities 

When the euro rises, the value of companies traded in other currencies falls. This development also applies to dividends. A simple example will show this. Let’s assume that USD and EUR are worth the same amount, and a share of a US company costs USD 100. Then the share also costs 100 EUR for European investors. So the investor buys this share for 100 EUR. Then the following happens: The Euro doubles in value. The share, which still costs 100 USD, would now only be worth 50 EUR. So the investor has suffered a price loss of 50 percent.

Imagine that happens to you when you are about to retire and have imagined a relaxed life with your dividends. Of course, this is an extreme example. However, a currency may devalue 40 or 50 percent over a longer period of time.

My approach is simple and easy to follow

Currency fluctuations are a problem that investors have to deal with. Here it is an advantage that changes usually occur over a long period of time. Furthermore, they do not always have one direction. For example, the EUR is very volatile against the USD. After the euro has lost more and more value in recent years, it is rising somewhat more strongly again.

strong euro how to react as an investor
The strong euro seems special, but historically, the euro is not that expensive (Source: Yahoo finance)

So I ride these waves because they also have advantages. Remember the example above? The investor suffers a book loss of 50 percent. That hurts. But he now gets the same company for half the price. Thus, the euro gives him much greater purchasing power. He can take advantage of that and get twice as much of the cake for the same price.

Time is your friend

Hence, time is your friend and ensures that you end up with an average price for your purchases. Don’t be disappointed if your dividends fall due to the stronger Euro, even though you are constantly buying new shares. Rather look forward to the moment when the wind turns. When the euro loses value again, it acts as a boost for your shares and your dividends. So every page has two sides.

I buy European stocks

The strong euro shows once again how important a geographical diversification of your asset classes is. Accordingly, I also buy European stocks. It is difficult for cash flow-oriented investors to find as many dividend jewels in Europe as in the USA. And then there are also different taxes in different countries. But all this should not stop you from investing in Europe. Europe is a region with stable economic and political conditions, where many outstanding companies have their headquarters.

I especially like to invest in European family businesses. In my eyes, there is a connection between family ownership and far-sighted management. Such companies do not think in quarters, but rather in years or even generations. I consider the company’s strong ties to the founding family and their will to maintain and increase success in the long term to be advantageous and am pleased to benefit from this through a shareholding. Europe has many such companies. My favorite examples are Henkel and CTS Eventim from Germany, Mayr-Melnhof from Austria, LVMH from France, or Inditex from Spain.

You have other companies that might be worth considering, such as Logitech from Switzerland, the insulin specialist Novo Nordisk from Denmark, or the brewer Anheuser-Busch InBev from Belgium. From the UK, I find GlaxoSmithKline or Reckitt Benckiser great. If you are into cloud and tech growth, you will also find what you are looking for in Europe. SAP or TeamViewerAG are two such fast-growing and profitable companies. I have many of these companies in my own portfolio, and I’ve never regretted it. Logitech, for example, is one of my best-performing holdings.

I get US stocks at a lower price

If you are a European investor in the buying phase, a strong euro is enormously helpful to buy cheap dividend shares from US companies. So if you buy US shares with euro, you get a discount compared to last year. Therefore, I don’t care if I get a slightly lower dividend because the euro has weakened. This is particularly true for the phase in which I would like to continue investing. I’m just happy that I can buy more shares for the same money than before.

Go beyond

But Europe and America are not enough. You should also cover the other markets, especially Asia and the emerging markets. Here I have some catching up to do. Yep, I have stocks like Tencent in my portfolio. But Asia and the developing countries are underrepresented. If you do not know exactly which companies to invest in, an ETF might be a wise choice. That’s how I will proceed in any case. Until the end of the year (2020), I will invest (probably in tranches) in an Asia/Emerging Markets ETF and further diversify my portfolio. For this purpose, I have chosen an ETF that covers the MSCI Emerging Markets Index. In my TEV Report from September (click here), you can find some information about this investment and its reasons.

Conclusion: It is always a good time to diversify your retirement portfolio

Always remember, investing means becoming an owner of companies. The will to invest in as much capital as possible should be an attitude that accompanies your whole life. Don’t let the many stones that lie in your way distract you from your goals. Just keep investing in excellent companies. Ensure that you buy these companies at a reasonable price and keep them in your portfolio as long as possible. As an alternative, you can use ETF savings plans. They are unbeatable in terms of simplicity. Whatever you choose,

I wish you all the best.



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