FX-hedged stocks seen outperforming as euro rises, says Morgan Stanley

Investing.com -- Morgan Stanley analysts said in a note Monday that as the U.S. dollar’s 15-year bull run appears to be ending, they see a clear opportunity for European equities with advanced foreign exchange (FX) hedging strategies to outperform.

The bank highlighted how companies that manage currency risks effectively are likely to benefit as the euro gains ground.

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“We find companies with advanced FX hedging tend to outperform and expect material EUR strength beneficiaries to continue breaking to new highs,” Morgan Stanley analysts wrote, citing proprietary screens that identify such stocks.

The report highlights the unique complexity of FX exposure in Europe, where only about 44% of MSCI Europe revenues are generated domestically.

“FX implications extend well below the surface of regional revenue exposures,” the analysts explained, noting the diversity of local-to-local strategies, multiple home currencies, including EUR, GBP, NOK, and CHF, and mismatches across costs, balance sheets, and cash flows.

Morgan Stanley projects a further weakening of the dollar, forecasting EUR/USD at 1.25 and GBP/USD at 1.45 by mid-2026, with bull-case scenarios of 1.30 and 1.51.

“These currency moves are likely to have implications for corporate and investor FX hedging strategies,” the bank said.

Morgan Stanley collaborated with FX strategists and sector analysts to assess FX exposure across roughly 550 European companies, aiming to reduce subjective interpretation.

“A core part of our process has been smoothing out subjectivity, creating an apples to apples playing field,” the analysts noted.

As FX dynamics gain investor attention, Morgan Stanley believes companies that proactively hedge are well-positioned to ride the euro’s rise and outperform their less-prepared peers.

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