Currency Returns Since the Crash

It is important to realize the impacts of currencies on the stocks that you select, and your portfolio in total. If you are a US citizen (as are most readers of this blog), then your portfolio of stocks, bonds and cash is essentially “denominated” in US dollars).

The fact that the Australian dollar is up 50% from the 2009 market nadir (against its’ own performance) is compounded by the fact that the US dollar dropped during the last 5 years, for a “net” impact of over 70%. While this is a simplified example, if you just held Australian dollars (plus their implied governmental interest rates), and then transferred them (plus interest) into US dollars at the end of that period, you’d be up 70% on your money (US dollars).

This is important because we have Australian, European, Japanese and ETF’s from other nations in our portfolio.  The fact that the dollar has overall been declining during this period means that stocks held in other currencies have seen their returns boosted in comparison to US dollar investments (like stocks on the NYSE or NASDAQ or US Treasuries).

While there are many reasons why the US dollar has been a poor performer, past performance is not a good indicator of the future, and currency fluctuations are very difficult to predict.  Many people (myself included) have been mystified by the continued strength of the Euro, but the historical returns are undeniable.

When you are selecting stocks, particularly ADR’s which represent stocks traded on foreign exchanges, currency returns may be just as important as stock returns.  When you view the performance of the stock in US Dollars, both the currency returns and the underlying stock performance are “one” number, since the price of the currency is part of the ADR stock price.  To see the impact of the currency, you need to look at underlying performance in the “native” stock market and view this against the price of the ADR in the US market.

Screen Shot 2014-07-19 at 1.46.45 PM

In this case we’ve graphed WBC (the Westpac Banking Corp stock on the Australian Exchange) against the equivalent US ADR (WBK) that trades on the New York Stock Exchange.  You can see how the two stocks mirror each other, with an additional “kicker” on the US ADR because of the decline of the US dollar against the Australian dollar.  If the Australian dollar underperformed vs. the US dollar, these trends would be reversed.  Note that there are many other additional factors to consider including dividends received (WBK is a heavy dividend payer).  With free graphing and analysis tools available at Yahoo and Google and many other sites, it is much easier to do these sorts of analyses and to spot the impact of currencies on your investments.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s