Stock Market Returns Lost in Translation

One of the side effects of a weaker dollar is that the returns for foreign investors who invest in US assets are diminished. While the value of the asset may rise in dollar terms, if the dollar is losing value, the investor takes a hit when they convert their funds back into their domestic currency. For example, while the S&P 500 has risen 20.2% so far this year in US dollars, investors outside of the US have generally seen much less impressive returns.

In the table below, we looked at the YTD returns of the S&P 500 for investors in various currencies. Of the currencies we looked at, the only one that has seen a benefit from the currency translation is the Argentinean Peso. Returns have been diminished once fluctuations are taken into account for all other currencies. And of course some countries have been affected more than others. So far this year, Brazilian investors who bought the S&P 500 at the end of last year have lost nearly 12 reals for every 100 they invested on January 1st.

Comments

[adan:]

fascinating stuff, thanks!

Nov 09 02:16 PM

[Robert Mart...:]

Bespoke Inv Group:

Your thesis is correct, and it provides good food for thought.

Graham Summers wrote about this in depth in his article "Dollar's Decline Has Contributed to Market's Recent 'Rise'" seekingalpha.com/artic...

The reflation rally is the mother of all liquidity bubbles, and reflects quantitative easing and record budget deficits. As you noted, however, this has NOT translated into strong returns for foreign investors. They are recognizing that the U.S. is now at risk of default on its debts or continued devaluation of its currency.

I predict that this liquidity bubble will collapse when:
1) Quant easing ends
2) Foreign capital flows reverse (because of higher potential returns in other assets or geographies)

Once QE fades and/or foreign capital dries up, we will see a run-up in interest rates. The 3.6% yield on 10-year U.S. government bonds is temporary, and higher rates will be needed to attract capital in light of inflationary risks and the potential for default. Higher yields will cause capital to flow out of the equity market and into the debt market, which will appear more attractive by comparison. Higher rates will also slow the economy, which is now sustained only by unrealistically low rates.

For now, quant easing and foreign capital flows are the key events to watch. Until then, the market rally is likely to continue, as global reflation boosts NOMINAL returns for all risk asset classes.

Thanks for the article! It is good food for thought.
Rob

Nov 10 02:47 PM

[predictorma...:]

Maybe this is contributing to the lower volumes. No reason for a foreign investor to put his money to work in US markets if he thinks the dollar is moving lower.

Nov 10 03:20 PM

[GeminiAtlas:]

Alternatively, would the expectation of weakening dollar also incentivize US-based investors to put their money elsewhere to take advantage of the carry trade? I know I am incentivized to diversify my holdings in other currencies given the weakening of the dollar.

Nov 10 04:36 PM