Can Foreign Currency Changes Boost Investment Returns?

Chart of the Week: Can Foreign Currency Changes Boost Investment Returns?

Foreign stocks are off to a roaring start in 2023, carrying momentum built during last year’s final weeks. Over the past three months, the MSCI All-Country World index ex-U.S., a measure of non-U.S. equities, has returned nearly 21%. By contrast, the S&P 500 has gained about 9%.

Wall Street has noticed: A recent Reuters poll of portfolio managers who oversee global strategies found that six out of 10 overweight foreign investments compared to their U.S. counterparts—the highest percentage since 2005.

After a decade of underperformance, is the stage being set for a sustained rally in overseas markets? We think so—in part because a weakening dollar is making foreign stocks more attractive than they’ve been in quite a long time.

Our chart of the week helps demonstrate the relationship between the dollar’s strength and the relative performance of U.S. and non-U.S. stocks. The blue line charts the relative performance of foreign stocks vs. U.S. stocks. When the line is rising, U.S. shares are performing better. The opposite is true when the line is dropping. You can see that the dashed line, representing the U.S. Dollar Index, moves in near correlation.

Over the past 25-plus years, a clear relationship has developed: As the dollar rises, U.S. markets outperform. In periods of dollar weakness, we can also observe the inverse—foreign stocks begin to outpace their counterparts.

Is a weaker dollar good for foreign stocks?
Note: Blue line traces the relative performance of U.S. stocks as measured by Vanguard’s Total Stock Market Index fund and of non-U.S. stocks as measured by Vanguard’s Total International Stock Index fund from April 1996 through November 2022. When the line rises U.S. stocks are outperforming. Sources: U.S. Federal Reserve, Vanguard.

Predicting the path of currency trends is nearly impossible. The important takeaway is this: After more than a decade of strong dollar performance and a shift in the foreign currency tides, a tailwind is improving foreign stock investment returns, and that wind may continue blowing.

This material is distributed for informational purposes only. The ideas and opinions contained herein should not be viewed as recommendations or personal investment advice. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here.

© 2023 Adviser Investments, LLC. All Rights Reserved.