We have noted several times in this blog and in LPL Research’s Weekly Market and Weekly Economic Commentaries that the relative strength of the U.S. dollar is a major, and perhaps even the dominant, factor in the relative performance of overseas assets to domestic stocks. Overseas markets are not all the same: there are great differences between developed and emerging markets. Many of these differences can be seen in how their currencies fluctuate.
The chart below shows the performance of the currencies of developed and emerging market countries, as defined by membership in the MSCI EAFE and Emerging Market Indices respectively. Periods when the currencies are increasing in value (appreciating in trader speak) relative to the dollar mean that overseas investments have a currency tailwind, though it does not guarantee that they will outperform. When the currencies are depreciating in value, it tends to lead to underperformance of foreign investments.
Developed and emerging market currencies tend to move together, but not always. At the beginning of this year both sets of currencies gained against the U.S. dollar, but the emerging currencies did so more sharply. But since the middle of the year, emerging currencies continued to gain, while developed market currencies resumed their slide against the dollar. This strength in their currencies is one reason why emerging market assets have outperformed both developed foreign and U.S. stocks thus far this year. We will be looking for continued stability, if not further strength, in emerging market currencies to increase our conviction in emerging market performance relative to domestic stocks.
Past performance is no guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
The MSCI EAFE Index is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises the MSCI country indices that represent developed markets outside of North America: Europe, Australasia, and the Far East.
The MSCI Emerging Markets Index captures large and mid-cap representation across 23 emerging markets (EM) countries. With 822 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Indices are unmanaged index and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
This research material has been prepared by LPL Financial LLC.
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