An alternative ETF strategy to hedge against weakness in Europe

AAs the outlook for the European market darkens, traders may turn to a bearish ETF strategy to bet on further difficulties in this region of the world.

European stocks slid to an over-year low on Thursday after slowing business activity in the euro zone fueled growth concerns, and German stocks were particularly hard hit after the country triggered the “alarm phase” of its gas emergency plan, Reuters reported.

A survey by S&P Global has found that business growth in the Eurozone has slowed significantly and far more than many had previously expected, with consumers postponing purchases to save money in the face of rising prices for energy. A PMI covering the bloc’s dominant services industry slipped to 52.8 from 56.1.

“There was this underlying expectation that services would always do well. The PMI poured cold water on that belief,” Andrea Cicione, chief strategy officer at TS Lombard, told Reuters.

“Until central banks receive a signal to move towards a more dovish stance, the market will continue to focus on downside risks to growth,” Cicione added.

Demand for manufactured goods also fell at the fastest rate since May 2020 when the coronavirus pandemic began to spread, and the overall factory PMI fell to a nearly two-year low of 52.0 from 54. .6, compared to expectations for a modest decline to 53.9, Reuters reported. Meanwhile, an index measuring production, which feeds the composite PMI, also fell to 49.3 from 51.3, the first reading below 50 in two years, reflecting a contraction.

“New business inflows have stagnated, driven by falling demand for goods and falling demand for services from cash-strapped consumers in particular,” chief economist Chris Williamson told Reuters. at S&P Global. “At the same time, business confidence has fallen sharply to a level not seen pre-pandemic since the region’s economic contraction in 2012, pointing to an imminent downturn unless demand picks up.”

Against this kind of backdrop, Ray Dalio’s investment management firm, Bridgewater Associates, built a $10.5 billion bet against European companies, nearly doubling its position last week to become the most bearish against the shares in the region in two years, Bloomberg reported. Bridgewater’s current bearish position is the highest since the company held $14 billion against European companies in 2020 and before that, a $22 billion bet in 2018.

Investors who are also worried about potential weakness in Europe can look to alternative ETF strategies to hedge risk, such as the ProShares UltraShort FTSE Europe (EPV)which tracks the -2x or -200% daily performance of the FTSE Developed Europe All Cap Index.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Mary I. Bruner