Strong Dollar Clobbers Returns of Foreign-Stock Funds

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stratton
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Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by stratton »

WSJ: Strong Dollar Clobbers Returns of Foreign-Stock Funds

This graphic shows it all:

Image

Yes, there are currency effects to your investment. Welcome to the stronger US dollar. The locals can make money and a US based investor can lose at the same time because of currency rates.

Paul
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Rodc
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by Rodc »

Interesting.

Thank you.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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William Million
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by William Million »

and keep in mind many still consider the dollar undervalued at $1.23 : EU 1. Of course, if we saw something closer to parity with the euro, it might be a good buying opportunity for those holding dollars
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SimpleGift
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by SimpleGift »

Nice chart, stratton, thanks. For a look at the same data set over the last decade:

Image
Source: Deutsche Asset Managment
Rodc
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by Rodc »

Simplegift wrote:Nice chart, stratton, thanks. For a look at the same data set over the last decade:

Image
Source: Deutsche Asset Managment
Very interesting. I have not looked at this before.

If I typed the numbers into Excel correctly this means that the benefit/cost of currency impacts on an annual basis over this time period is
EAFE +0.98%
Japan -2.96%
ACWI +1.21%
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by nisiprius »

I pointed out, in the past, that a back-of-the-envelope calculation showed that at least 2/3 of the superior performance of international stocks from 2000-2009 had nothing to do with intrinsic differences in businesses or earning and was simply due to the weakening of the dollar.

The effect of currency movements is important and isn't just some kind of academic detail.

When I pointed this out around 2008 or so, a fairly commonly-expressed opinion was that continued weakening of the dollar was all but certain, and strengthening of the dollar was all but impossible.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by tigermilk »

1) with foreign investments cheaper it's a buying opportunity
2) with foreign currencies down it's a great time to travel
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by thx1138 »

nisiprius wrote: When I pointed this out around 2008 or so, a fairly commonly-expressed opinion was that continued weakening of the dollar was all but certain, and strengthening of the dollar was all but impossible.
"Interest rates can only go up from here"

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bamajames
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by bamajames »

Nisi,
Would the same calculations now imply a similar currency headwind for international?
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Kenkat
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by Kenkat »

I have also heard in the past that much of the diversification benefit of international investments are actually attributable to the currency fluctuations rather then differences in how markets perform. At the current time, we are seeing a negative impact; in the past (and likely future at some point in time), it was a positive impact.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by madbrain »

I'm not really sure if I believe this data from WSJ.

VTIAX - Vanguard total international Admiral - has a total return of -0.24% YTD in US dollars.

I realize this is now a different index - FTSE Global all cap ex US - and not EAFE + Emerging markets as it was before.

Does the difference in index explain the 4% better return of VTIAX vs EAFE ?
Or is it possible that WSJ is actually listing price change somewhere in one of the boxes, and not total return ?

Also, VWO - emerging markets - is also +6.02% YTD, total return .

As a holder of these, I'm not really seeing a buying opportunity at this point, even though the returns have been less than expected due to currency fluctuations. I'm not rebalancing into international.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by ray.james »

madbrain wrote: As a holder of these, I'm not really seeing a buying opportunity at this point, even though the returns have been less than expected due to currency fluctuations. I'm not rebalancing into international.
Can you explain why you do not consider these not a buying opportunity? Is it because that are not discounted enough relative to US markets or their valuations in local currency more muted?
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by michaelsieg »

Can you explain why you do not consider these not a buying opportunity?
Not to answer for Madbrain, but I also would not time my investments based on currency exchange rates. If you look at the influence of exchange rates on international returns, in 5 of the 10 years listed by simplgift it made a difference (positive or negative) of greater than 10%.
There is some rationale to base long-term return expectations on stock market valuations, but currency exchange rates lack predictive models to my knowledge. Just look what happens right now with the russian currency, no one can predict where it will end up in 3-6 months. On the other hand, RSX, a russian market ETF, now has a PE of about 6.5 and a dividend yield of 8% (Morningstar data), which makes significant long-term return expectations (in local currency) likely, but their currency destabilization might offset these expectations...
lazyday
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by lazyday »

michaelsieg wrote:currency exchange rates lack predictive models to my knowledge
You could simply assume PPP will revert to equality. It's probably easy to get PPP data online; it was easy enough in the late 1990s but I haven't tried lately.

Research Affiliates also looks at productivity differences between US and the country of the other currency. This is explained in their currency methodology paper. You can now get their latest predicted currency returns each quarter: http://www.researchaffiliates.com/Asset ... ncies.aspx

Be careful about separating out the cash return if you're interested in currency return of foreign equities. You can just go to the equity tab and look at the "FX" component.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by William Million »

ray.james wrote:
madbrain wrote: As a holder of these, I'm not really seeing a buying opportunity at this point, even though the returns have been less than expected due to currency fluctuations. I'm not rebalancing into international.
Can you explain why you do not consider these not a buying opportunity? Is it because that are not discounted enough relative to US markets or their valuations in local currency more muted?
People consider the dollar "strong" simply because it was extremely weak over the past decade. By many measures, the dollar is still undervalued.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by nisiprius »

Of course I don't believe in market timing in general, but I think currency is high on the list of markets not to even dream of trying to time.

First, it is an area where professionals regularly get burned on a mammoth (or should I say cetacean?) scale:
Goldman Sach lost $1 billion on currency trades during the third quarter
Image

Second, the stock market is, or at least seems to be, the province of mass action, involving decisions by large numbers of investors acting on mostly-public information. It possesses the dynamics of a free market, and there is surely such a thing as "market psychology" (whether or not one believes it is possible to profit by understanding it).

Currency, on the other hand, is the province of government policy, and is hugely affected by very small number of officials making decisions in secret behind closed doors. The Plaza Accord of 1985 was "an agreement between the governments of France, West Germany, Japan, the United States, and the United Kingdom, to depreciate the U.S. dollar in relation to the Japanese yen and German Deutsche Mark by intervening in currency markets" and it marks the precise top of the dollar index, which doubled in about five years and then halved in about five years:

Image

Third, because it is so influenced or dominated or controlled by small numbers of officials acting in secrecy, the effect of anything close to inside information is going to be magnified.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by madbrain »

ray.james wrote:
madbrain wrote: As a holder of these, I'm not really seeing a buying opportunity at this point, even though the returns have been less than expected due to currency fluctuations. I'm not rebalancing into international.
Can you explain why you do not consider these not a buying opportunity? Is it because that are not discounted enough relative to US markets or their valuations in local currency more muted?
For one thing, these markets haven't dropped appreciably - they just failed to appreciate as fast as US equities, which arguably rose too fast.
And for another, I had more than 50% of my equities in international allocation, and now still about 50%, and my AA says I shouldn't own more

The only kind of rebalancing I'm doing is into bonds. I'm not selling any equities, but I also haven't bought any equities in over a year. All my new contributions are going towards some sort of bonds, mostly stable value. The low return on that money is getting a little long in the tooth, but I'm still below "age in bonds".

I'm hoping at some point there will be some kind of significant enough drop in equities to justify rebalancing into stocks. The drop in October was not enough IMO, I won't consider it unless there is a 20% drop or my AA gets too out of whack.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by michaelsieg »

You could simply assume PPP will revert to equality. It's probably easy to get PPP data online; it was easy enough in the late 1990s but I haven't tried lately.
Lazyday
I agree that this is what a free exchange market with minor government interventions would result in. But there are significant shifts in relative purchasing power. I found the following link about purchasing power parity (PPP) conversions, that might be helpful:
http://data.worldbank.org/indicator/PA. ... t&sort=asc

I checked the data for Switzerland and it essentially shows a significant shift in PPP over the past 20 years, similar to Nisi's dollar index chart. I got burned in the late 90's by converting my wife's school loans (in USD) with a 7.5% interest rate into a Swiss Franc loan with a 2% interest rate.....the devaluation of the US dollar vs the Swiss Frank ate us alive and we had to pay about 90% more in principal over the next 10 years....
Thanks for the research affiliates link, looking forward to reading it.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by William Million »

One analyst who foresees nearly dollar/euro parity by end of 2015:

http://www.bloomberg.com/video/euro-may ... cmpid=yhoo

Obviously, Bogleheads take any prediction with a grain of salt, but it does underscore the view that the dollar currently is not strong. It is less weak than it has been for much of the past decade.
Last edited by William Million on Sat Dec 06, 2014 10:01 am, edited 1 time in total.
Pizzasteve510
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by Pizzasteve510 »

Back when I was a more active investor, I remember the a Euro being at .75 to the dollar. Many at that time were predicting eventual parity through a long rise to a 1:1 ratio. I tried to see through my broker if I could buy a euro denominated long term govt bond at a decent positive interest rate (looked at Spain, etc.), but could not find a way to get them with what seemed to be reasonable effort (sadly missed that chance). Still, it is worth reflecting on how much rates can change.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by fundtalk »

I don't understand why Vanguard doesn't hedge currency? Exposure to currency risk doesn't seem to add anything to a US investor's portfolio (at least this was the take away I had from Bogle last time I read Common Sense...which was a while ago.) Obviously hedging adds some cost, but Vanguard seems to be able to do it with minimal added expense in the funds they do hedge.

I compared the results of the global all cap portfolio with the global hedged all cap portfolio and the hedged portfolio outperforms for 1,3,5,10 years....but, is this just end point bias?
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by BlueEars »

A long term chart with EAFE being the MSCI Europe, Asia, Far East Index to Feb 2010 and after that Vanguard's VFWAX. The SP500 line includes dividends. The dollar data is a trade weighted Fed index.

Image

It wouldn't surprise me if the dollar kept on going up for a few years.

EDIT: Revised chart to corrected one.
Last edited by BlueEars on Sat Dec 06, 2014 1:34 pm, edited 1 time in total.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by nisiprius »

That is one beautiful chart. If you can eyeball sums and differences it is a spectacular demonstration of the degree to which differences in EAFE/US performance match up with changes in the dollar index.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by RunningRad »

tigermilk wrote:1) with foreign investments cheaper it's a buying opportunity
2) with foreign currencies down it's a great time to travel
I plan to do both!
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by BlueEars »

nisiprius wrote:That is one beautiful chart. If you can eyeball sums and differences it is a spectacular demonstration of the degree to which differences in EAFE/US performance match up with changes in the dollar index.
I needed that Nisiprius. Thanks, you made my day. :happy
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by DonCamillo »

When the Euro started trading against the dollar about 2002, the value fluctuated around 85 to 95 cents. It almost doubled to roughly $1.60 before the chaos of 2007 to 2009. Now we are about half way between the historical minimum and maximum values. I don't see any reason it could not go up or down significantly from the present value.
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Re: Strong Dollar Clobbers Returns of Foreign-Stock Funds

Post by BlueEars »

I realized that in the previous chart above, for my own purposes I had set the EAFE = SP500 at the May 2009 point. So I've now removed this in the chart above. Curiously, the SP500 matches the International gain after 43 years.
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