The Weak U.S. Dollar Puffs Up Overseas Equity Returns
Yet the earnings potential of developed and emerging markets stocks is real, since they are at earlier points in their respective business cycles.
Fundamental indicators continue to show broad health in economies and most companies around the world. But adjusting for currency effects in equity market returns adds perspective on relative valuations and especially where we are in the business cycle of different regions across the world.
In U.S. dollar terms, it appears that U.S., international developed (MSCI EAFE Index) and emerging markets (MSCI EM Index) are all moving modestly higher this year (through April 18). But if we exclude the translation effect of the weakening dollar, when considered in local currency terms international developed markets are performing materially worse than the U.S. or even a flat emerging market. If earnings ultimately drive equity-market returns, developed and emerging markets remain attractive alternatives to the U.S., even in dollar terms, as indicated in the graphic below.
Equity Market Total Returns in US Dollars | 1Q18 | April 1–18 | YTD |
---|---|---|---|
U.S. (MSCI USA Index) | -0.6% | +5.2% | +2.3% |
International Developed Markets (MSCI EAFE Index) | -1.4% | +3.2% | +1.7% |
Emerging Markets (MSCI EM Index) | +1.4% | +0.7% | +2.0% |
Equity Market Total Returns in Local Currency | 1Q18 | April 1–18 | YTD |
U.S. (MSCI USA Index) | -0.6% | +5.2% | +2.3% |
International Developed Markets (MSCI EAFE Index) | -4.3% | +1.9% | -3.1% |
Emerging Markets (MSCI EM Index) | +0.7% | +0.0% | +0.3% |
NEXT 12 MONTHS’ EARNINGS INDEXED TO SEPTEMBER 2006
Source: Bloomberg, blended forwards 12-month estimates
as of April 18, 2018.