Is It Time to Sell Your Foreign Stocks?
Notwithstanding the dollar’s rally—and signs of a European slowdown—your standard of value may continually travel well, particularly in high-growth economies
By Christopher Farrell
The stock prices of mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) have cratered. The bottom of the worst housing fall through since the Great Depression hasn’t been reached. Fears of inflation are mounting.
Yet the dollar is rallying against foreign currencies. Despite late gyrations, the U.S. Dollar Index, a futures contract provident the dollar’s value against six major currencies, is up 9% since reaching a recent low on July 15. The turnaround is a major go-between behind the stock emporium’s 4% gain over the same period, along with the decline in oil prices.
What does the possibility of a stable-to-stronger dollar mean on account of the between nations stocks in your portfolio? Is it particular period to bail? A lot is at stake: Since 2003, else $490 billion in net new cash poured into international dullard funds, vs. a net $208 billion for domestic stock funds, according to the Washington (D.C.)-based Investment Company Institute. And how about foreign bonds? Thanks to the weak dollar, U.S. investors in irrelevant bonds accept enjoyed a currency-translation boost to their yields in recent years.
Thinking through the impact of the dollar’s moves used to have being simpler. The old maxim was that when the dollar was strong you should flee international securities, and when it was weak you should send money overseas. But hewing to simplistic truisms is hazardous in today’s quicksilver global capital markets. Profiting from any turn in the dollar’s fortunes requires a more nuanced strategy now—and patience.
First of all, emporium veterans call for a realty check on this joke. Few expect the dollar to retrace years of losses anytime soon, and a 9% gain is tiny compared with the greenback’s 50% slide adverse to the euro and 30% tumble against the British pound over the past six years. Still, the global economic cycle may approve America’s money; aggregate of coin. While the U.S. slid into a downturn or even a recession about a year ago, only freshly has improvement faltered among other major industrial nations, especially in Europe. “We are picking up and they are slowing,” says James W. Paulsen, chief investment strategist of Wells Capital Management (WFC).
The global business period should affect the rift between private interest rates set by the world’s central banks. There is a extending expectation that the difference in yields will narrow, especially betwixt the U.S. and Europe. The Federal Reserve Board’s benchmark assessment is 2% while that of the European Central Bank (ECB) is 4.25%, and Europe could become a less attractive parking place for yield-hungry investors for the reason that the ECB combats economic weakness. “The dollar rally we have seen has been especially against the euro,” says Bob Doll, vice-chairman and global chief investment officer of equities at investment contrivance firm BlackRock (BLK). “The ECB’s next move will be to lower rates, and I’m talking in months rather than years.”
