Plunging Dollar Erodes Foreign Investors' Returns

With the U.S. dollar falling down a precipice, spare a thought for non-U.S. investors invested in U.S. stocks and bonds.

The graph below shows the performance of the S&P 500 Index since the beginning of 2007 in both U.S. dollar terms (red line), and euro terms (blue line). Whereas U.S. investors are showing a very poor return of -8.03% for the period, euro investors are completely under water to the tune of -21.02%. For the year-to-date, the figures are -11.78% (U.S. dollar) and -15.50% (euro). (Although I am using the euro in this example, the same logic applies to most other non-U.S. dollar currencies.)

Source: StockCharts.com

The next graph illustrates the same principle for bonds by comparing the performance of U.S. 10-year Treasury Notes in U.S. dollar terms (red line) with the same bonds from the viewpoint of a European investor (blue line). Whereas U.S. investors have every reason to be relatively pleased with a return of +10.28%, euro investors are in the red by -5.28%. For the year-to-date, the figures are +4.98% (U.S. dollar) and +0.55% (euro).

Source: StockCharts.com

With the falling dollar, the U.S. is becoming like a candy store for foreign investors, but that does not mean that the focus will necessarily be on run-of-the-mill portfolio investments in U.S. stocks and bonds, as a case can be made that neither asset class offers particularly appealing value. As a matter of fact, any sell-off in the U.S. markets could result in large-scale foreign liquidations. Capitalizing on the favorable exchange rate, foreign investments may for a while be directed more towards picking out the gems by means of corporate deals. That certainly seems to be the emphasis of the Sovereign Wealth Funds.

Comments

[algoa456]

True in principle, but there are some currencies like the SA Rand that have fallen substantially too which mitigates some of the loses

[ilikeprivacy]

Hedging the currency risk would've been a good idea...

[James Seaberg]

For foreign investors, there is also another candy store open. This is for US grown grains. As the dollar goes down the prices of these candies rise.

[Kunst]

Worldwide, money is flowing to the oil producers like water runs downhill. A goodly chunk of the dollars we send to China for all that stuff they make for us gets spent for oil. OPEC is a financial black hole.

Put yourself in the place of a middle eastern government with hundreds of billions of US dollars. What do you do with them? As this article points out, most investments in the US are money losers in non-USD terms. Yet sooner or later, you have to buy something here with them.

My guess is that the big oil dollar pool is biding its time, waiting for the US stock market to become an extremely compelling bargain. Once the US gets knocked off its pedestal, we are going to have to play by the same rules as everyone else. In this case, that means we get to redeem those dollars for solid US corporations now made competitive by the collapse of the dollar.

For now, the oil folks can park their excess dollars in treasuries. But think what happens when they pull back from that, with our now $400B-and-rising deficit. Why interest rates skyrocket, the US stock market goes in the tank, and talk about bargain time...