Here's hoping you didn't plan a winter getaway to California or, worse, a ski trip to Switzerland. Because if you're a euro wage-earner and saver, both vacations just got dramatically more expensive.
Need proof? Look no further than this three-year chart of the euro versus the U.S. dollar and Swiss franc:
How's that for some steep downhill skiing?
The recent dramatic move in the Swiss franc was the result of the Swiss National Bank's sudden and unexpected move to unhinge the Swiss franc from the euro. The central bank had been buying euros aggressively in order to keep the franc cheap – and therefore its economy competitive – amid strong demand for the franc. The moment they stopped defending the franc, the Swiss currency soared against the euro, making that Swiss ski chalet rental instantly about 20% more expensive for euro holders. Bummer.
However, the sharp decline in the euro against the dollar (and many foreign currencies) in recent months is due to a combination of a number of factors:
- Many countries in the eurozone have been teetering on the edge of recession. That curbs financial inflows to the eurozone because investors and lenders aren't willing to invest because of the greater fear of poor returns.
- The European Central Bank recently announced new stimulus measures, including a massive new bond-buying program which is likely to flood the market with euros.
- Meanwhile, both of the above have sent yields for most sovereign eurozone to historically low levels. The average euro-area bond yield recently hit 0.68%. And the yield on the German 5-year bond recently went negative. European investors have become so risk-averse, they're actually paying Germany just to hold their money!
All of this has conspired to send the euro down to an 11-year low against the U.S. dollar. Perhaps it's time to rethink those travel plans.
Who loses when the euro crashes?
Okay, besides the European traveler and saver, who is also hurt by the recent euro crash? Well, for starters, any company that generates most of (or even a significant proportion of) its sales in euros is going to feel some pain. Think about your average German company. Relative to other currencies, the average German, euro-reporting company is now generating significantly less revenue per product or service.
Multinational companies can be hit especially hard. In its most recent earnings press release, software giant Microsoft (NASDAQ:MSFT) said a "strong dollar" would negatively impact its revenue growth in the current quarter. It was the same story for global industrial conglomerates 3M (NYSE:MMM) and United Technologies (NYSE:UTX). Both companies reduced their 2015 earnings expectations as a result of swings in foreign exchange rates as each derives a significant amount of its revenue from foreign markets, including the eurozone.
Who wins? Maybe these three companies
But of course, there are those who stand to gain from a suddenly weak euro currency. Here are three companies who could benefit. Investing in them may just give you the currency hedge your euro-based investment portfolio is looking for.
As you lament your suddenly more-expensive trip to the United States, here's a company that helps travelers coming in the opposite direction. Priceline owns Booking.com, the world's most popular site for travel accommodations. As of the latest quarter, Booking.com's platform had 540,000 hotels and other accommodations in 207 countries. That's up more than 50% year over year. And Priceline itself derives more than 60% of its revenue from Booking.com, which is based in the Netherlands.
With the euro now significantly cheaper vis-à-vis other currencies, including the dollar, expect plenty of U.S. and foreign travelers to be booking vacations in Europe in the coming months. No one is likely to benefit more than Priceline.
Bayerische Motoren Werke (OTC:BAMXF) (ETR: BMW) (FRA:BMW)
In the long term, a weaker euro can actually be a boon to the Eurozone, particularly a country such as Germany. Remember, . A weaker euro makes Germany's exports cheaper and, therefore, more competitive in the global marketplace than those from other countries.
BMW is one of the globe's most popular vehicles brands, deriving a substantial amount of sales from outside the eurozone. In 2013, BMW generated 19.2% of its sales volume in the U.S. – almost as much as the company sold in Germany, France and Italy combined. A stronger U.S. dollar should give BMW's sales a major boost in 2015.
Deutsche Annington Immobilien (FRA: ANN)
Looking for a way to play both a weaker euro and historically low interest rates in Germany? Consider buying real estate – or investing in Deutsche Annington Immobilien. Annington is the largest owner of private real estate properties in Germany, presiding over 184,000 residential units. Through the first nine months of 2014, Annington's adjusted operating earnings climbed more than 25% and the company raised its dividend by more than 11%. It also added 5,000 more residential units to its portfolio, focusing heavily on the popular and fast-growing Berlin metro area.
A cheaper euro and cheaper credit conditions should drive steady demand for residential property, especially from foreign buyers. That should increase the value of Annington's property holdings. Meanwhile, Annington's annual dividend yield, now at over 2%, is far more than you can expect from your bank account or German bonds.