Currency swings often fan chatter and speculation amongst financial commentators Fisher Investments UK reviews. Many observers we follow argue these moves negatively impact both multinational and domestically orientated firms’ earnings – and, hence, equities. But according to our research, currencies’ strength – or weakness – isn’t a material equity market driver.
Whether a currency is strong or weak depends on its relationship with another – all currencies trade in pairs (e.g., the euro versus the US dollar or Japanese yen versus British pound). Yet we have seen both scenarios touted as detrimental for equities.
Commentators who Fisher Investments UK reviews often claim strong currencies hurt multinationals’ revenues – the logic being overseas revenues, denominated in weaker currencies, aren’t worth as much after conversion to a stronger home currency unless they raise prices, which can hit sales volumes. But commentators we follow also argue weak currencies spell higher import costs (fanning inflation, i.e., broadly rising prices across the economy) whilst possibly weighing on domestic firms’ earnings by inflating their input costs.
Whilst the rationale is mathematically true, Fisher Investments UK thinks currency swings’ impact on earnings and equities is muted for several reasons. First, firms can – and many do – hedge against currency swings, limiting the overall impact. Next, for multinationals with strong home currencies, we think the negative impact on overseas revenues is partially offset by cheaper overseas costs (materials, labor, etc.). Moreover, we have found multinationals don’t always repatriate overseas earnings, mitigating conversion’s impact.
Fisher Investments UK’s reviews of history reveal currency swings’ muted impact on equities. For example, 2016 – 2017 featured the pound weakening against the dollar – partly underpinned by Brexit chatter weighing on sentiment, in our view.[i] If conventional thinking held, we think the weak pound would have weighed on UK equities. However, 12 months from the pound’s low versus the dollar, UK equities delivered 10.0% gains in sterling, edging world equities’ 9.5% rise in the same currency.[ii] The strong US dollar didn’t hamper US equities in that 12-month span, either: America’s flagship S&P 500 index’s 24.5% returns in USD mirrored world equities’ 25.0% returns in USD.[iii]
In 2022, when the euro and dollar hit parity (their exchange rate was 1:1), some commentators Fisher Investments UK follows argued the strong dollar would hurt S&P 500 returns whilst others argued the weak euro would hamper eurozone equities.[iv] However, 12 months after July 2022’s parity, eurozone equities returned 23.8% in euros – outperforming world equities’ 9.0% in euros.[v] America’s S&P 500 rose 20.7% in dollars in that span, matching world equities’ 20.7% rise in USD.[vi]
Japanese yen weakness versus America’s dollar garners widespread attention, amongst financial publications Fisher Investments UK reviews. 2023 was one example we observed, as the yen hit multi-decade lows versus the dollar.[vii] Then, however, strong and weak currency claims didn’t hold for either country’s equities: Japanese equities’ full year 2023 returns were 29.0% in yen, near world equities’ 32.3% in yen – whilst US equities delivered 29.3% in dollars, topping the world’s 23.8% in USD.[viii]
Yes, currencies and equities can move according to common thinking, based on our research – yet that is coincidental, in Fisher Investments UK’s review, and lacks consistency. Hence, we wouldn’t draw broad conclusions from such cases.
When it comes to currency swings, Fisher Investments UK thinks investors benefit from separating headline noise from reality. Now, currency chatter can weigh on sentiment and, hence, equities – especially if firms attribute earnings weakness to them. And it is true that global investors can see skew (higher or lower) from currencies’ impact on overseas equities’ returns in their local currency. But that is about mathematics, not anything fundamental to the firm or currencies’ effects. In our experience, currency swings are more distraction (i.e., an easy, external scapegoat) than a fundamental earnings driver. Moreover, we have found sentiment can swing for any (or no) reason – and the impact is usually short-term, as markets digest information quickly and move on.
Then, too, we have found currency swings even out over the longer term. Based on Fisher Investments UK’s reviews of economic and market history, currency moves are cyclical – that is, no singular currency stays strong (or weak) forever. We think sentiment partly underpins that reality, as do individual nations’ interest rates (as we have found money flows to the highest-yielding asset globally, all else being equal). Hence, we think investors benefit from not letting currency swings – or associated headline coverage – impact their portfolio decisions.
Disclaimer: This document constitutes the general views of Fisher Investments UK and should not be regarded as personalised investment or tax advice or a reflection of client performance. No assurances are made that Fisher Investments UK will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. Nothing herein is intended to be a recommendation or forecast of market conditions. Rather, it is intended to illustrate a point. Current and future markets may differ significantly from those illustrated here. In addition, no assurances are made regarding the accuracy of any assumptions made in any illustrations herein. Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square, Canary Wharf, London, E14 5AX, United Kingdom. Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission.
Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.
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[i] Source: FactSet, as of 10/5/2024. Exchange rate between the US dollar and British pound, 31/12/2015 – 31/12/2017.
[ii] Source: FactSet, as of 10/5/2024. Exchange rate between the US dollar and British pound, MSCI United Kingdom total return in pounds and MSCI World Index return with net dividends in pounds, 16/1/2017 – 16/1/2018. Presented in pounds.
[iii] Source: FactSet, as of 10/5/2024. S&P 500 index total return in dollars and MSCI World Index return with net dividends in dollars, 16/1/2017 – 16/1/2018. Presented in US dollars. Currency fluctuations between the dollar and the pound may result in higher or lower investment returns.
[iv] “The Euro Hit Parity with the US Dollar for the First Time Since 2002. Here’s How Travelers Can Take Advantage of the Exchange Rate,” Greg Iacurci, CNBC, 12/7/2022.
[v] Source: FactSet, as of 14/5/2024. Exchange rate between the US dollar and euro, MSCI EMU (European Economic and Monetary Union) Index and MSCI World Index returns with net dividends in euros, 13/7/2022 – 13/7/2023. Presented in euros. Currency fluctuations between the euro and the pound may result in higher or lower investment returns. A bull market is a long period of generally rising equity prices.
[vi] Source: FactSet, as of 14/5/2024. Statement based on exchange rate between the US dollar and euro and S&P 500 index total return in dollars and MSCI World Index return with net dividends in dollars, 13/7/2022 – 13/7/2023. Presented in US dollars. Currency fluctuations between the dollar and the pound may result in higher or lower investment returns.
[vii] Source: FactSet, as of 13/5/2024. Statement based on exchange rate between the US dollar and Japanese yen 31/12/1989 – 31/12/2023.
[viii] Source: FactSet, as of 14/5/2024. MSCI Japan Index total return in yen, S&P 500 index total return in dollars and MSCI World Index return with net dividends in yen and dollars, 31/12/2022 – 31/12/2023. Presented in US dollars and Japanese yen. Currency fluctuations between the dollar and yen and the pound may result in higher or lower investment returns.