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IPE special report May 2018

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Currency volatility boosts returns more than equity gains – report

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Currency volatility associated with overseas equities has boosted returns for euro-denominated investors in seven of the last 13 years, according to Deutsche Asset and Wealth Management.

In a research note looking at the impact of hedging currency exposure for both US and euro-denominated investors, the asset manager found that non-domestic currency boosted headline returns for US investors by 2%, when basing investment strategy around the MSCI World Index.

The result was somewhat different for euro-denominated investors, with the MSCI World only 11.9% exposed to the single currency, with more than 57% of its exposure to US dollars and a further 8.6% to Japanese yen.

The note says: “From a euro-based investor’s perspective, non-domestic currency exposure has outweighed the underlying equity market return in seven years of the last 13.”

It goes on to note the various factors that could impact the value of a currency ­– ranging from a country’s current account deficit, growth forecasts or budget deficit – and how these impact exchange rates over the short to medium term, even if a long-term equilibrium is eventually established.

As an example, it cites the fact that, over the 15-year lifetime of the euro, from 1999 to the end of last year, it has only strengthened by 2.5% against the dollar.

The statistic, however, masks the fact euro-based investors saw the purchasing power of their dollar assets decline by 48% from 2000 to April 2008, a trend that was nearly reversed in the years following to March 2015.

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