Plunging Dollar Erodes Foreign Investors' Returns

Includes: FXE, IEF, SPY, UDN
by: Prieur du Plessis

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.)


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).


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.