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International stocks performed well in July, with emerging markets posting the best returns, writes J.D. Steinhilber, founder of ETF newsletter and investment management firm Agile Investing. The currency markets continue to play a major role in determining the returns from international stock investments such as ETFs, all of which are unhedged.

The strong rebound in the U.S. dollar in the first half of the year accounts for the large discrepancy in year-to-date returns for the MSCI EAFE Index, which was up 10.2% through July in local currency terms but only 1.9% in dollar terms.  This performance gap is shrinking in August as the dollar has been weakening versus foreign currencies.   

The strongest stock market among the developed economies in August has been Japan.  The iShares MSCI Japan Index Fund (symbol: EWJ) has gained 7% thus far in August as the Nikkei has rallied to its highest level in four years. This has been a welcome development for our portfolios, which are overweight in Japanese stocks.  The Japanese market has been rallying amid a number of indications that a sustainable recovery has taken hold in Japan.  Japan and Western Europe have been the weak links in the global economy, and both economies have recently seen their growth prospects upgraded.  This bodes well for a continuation of the global economic expansion and has bullish implications for stock markets worldwide.

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