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Isn’t the rally in equities just a fall in
the dollar?
A point we heard from many fund managers,
especially in Europe, was that the recent run-up in
stock prices is just a chimera. Every asset has
risen recently – when measured in US dollars. In
other words, all that has happened is that the
dollar has fallen. Is the equity rally, then, for real?
They have a point. In euro terms, global equities
have risen only 7% since July, not the 19% they
have in dollars (Chart 10). But at least they are in
positive territory y-t-d, thanks to the weakness of
the euro in the early part of the year. Switzerland
and Japan-based investors will be looking at the
world from a very different perspective. In yen,
global equities are still down 8% since the start of
the year – only slightly worse than Japanese
equities, down 10%.
At the very least, this reinforces the view that
currencies will be an increasingly important
consideration for equity investors, especially in a
world where equities, even if they produce decent
returns, are unlikely to be giving 20%-plus annual
returns.
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