Market Strategy Radar Screen Weekly October 03, 2018

Not All is Lost in Translation

Strong Dollar Puts Many Foreign Stocks “On Sale”

The appreciation of the US dollar since late March has dampened returns for US investors on most foreign stocks. We show below the sharp difference in price returns on foreign stock market indexes priced in those nations’ local currencies versus returns in US dollar terms in the year to date. In many markets, local currency returns exceed those priced in dollars (Mexico and Japan are exceptions).

The export dependency of many foreign economies underscores the vulnerability of these nations to a protracted trade war. Fears of a lingering stalemate in negotiations have in many cases impacted both the currencies and tradeable assets of these countries. As we believe that trade issues will be resolved sooner than many expect (as illustrated by the US-Canada-Mexico deal over the past weekend), developed and emerging international markets may be close to an inflection point.

In our view, the current pricing presents American investors the opportunity to buy foreign stocks while they’re “on sale” with a strong US dollar. While we can’t predict with any certainty that this is the high for the US dollar (or a low for foreign stocks priced in dollars), it nonetheless feels like an opportunistic time to buy. Should the dollar retreat in the coming months and years, translating these stocks’ performance and their earnings back to dollars could add to returns.

Many index mutual fund and exchange traded fund providers offer diversified portfolios of foreign stocks available to US investors,(including those based on the MSCI EAFE Index, composed of developed nation stocks excluding those of the US and Canada, and the MSCI Emerging Markets Index).

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