Friday, August 22, 2008

No currency kicker with international equities

One of the easiest ways to get currency exposure in a portfolio is through investing in international equities. This has been a windfall for investors for the last few years because the dollar has depreciated by over 40% since 2001. When the dollar direction turns, all of those international stocks will be worth less once they are converted into dollars.

All of the European stock indices have underperformed the US in their home currency and in dollars. The currency adjustment has actually been neutral for many of the indices so that the effects of the current dollar rally have been negligible. The impact has been much greater in the emerging markets where there has been a greater difference in the home versus dollar returns. In Latin America, dollar adjusted stock indices have done better tan local returns. Eastern Europe has more closely matched the other indices of the EU while Asian markets have shown more deterioration.

There will be less free lunch for international equity investors in 2008 so that the simple judgement of leaving currency exposure unhedged may not pay-off.

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