Foreign Equities and a Falling Dollar

Fidelity Management and Research recently pointed out that investing in non-U.S developed market equities can receive a boost from a falling U.S. dollar.  For example, during the past decade non-U.S. developed-country stocks outperformed U.S. stocks in all six years when the dollar declined, including for the first nine months of 2009.

The following observations are also worth noting when examining worldwide equity returns over the last decade:

  • U.S. equities declined in four of the ten calendar years (2000, 2001, 2003 and 2008).  In all four of those years, international equities also declined.
  • In three of those four negative years for U.S. equities (the only exception was in 2002), international equities fell more than U.S. stocks, in part because the dollar rose in value.
  • Foreign equities are ordinarily more volatile on both the upside and the downside when compared to U.S. equities.  In 2003, the best calendar year in the decade for U.S. stocks, U.S. equities rose 29% and international equities rose 39%.  Correspondingly, when U.S. stocks were down 37% in 2008, overseas stocks fell 43%.  

While it is widely believed that the U.S. dollar may continue to weaken (an alert to contrarians?) investors need to realize that over-allocating to non-U.S. equities can also raise the volatility of their portfolios. For the Fidelity article, please click here.

Scott Middleton