Thanks to the depreciating euro, European stocks are likely to perform better than their US equivalents over the next 5 years, with projected annual returns between 4% and 11%, depending on the country, according to Klement. The US lags significantly behind with return expectations of only 1.6% per year, about the same as US treasuries. “But we note that performance differences diminish if stock market performance is calculated in a single currency – the dollar or the euro,” Klement says.
Emerging versus developed
Klement also found that companies listed in most developed countries respond very differently to exchange rate movements than companies from emerging market economies. While a stronger home currency versus the dollar leads to weaker earnings growth in product-exporting countries, which are mainly located in developed markets, it results in higher earnings growht in commodity-exporting countries such as Russia and Brazil.
This finding does not surprise Klement, and he even has a plausible explanation for it. “It reflects the fact that a weaker US dollar tends to boost comodity prices and thus the revenues of commodity producers,” explains Klement. “At the same time, a weaker dollar and rising commodity prices tend to trigger investment flows into the commodity exposting countries, which in turn may lead to their home currency appreciating relative to the dollar.”
