Stronger returns

Contrary to the widely held view that equity markets supported by strong currencies will produce better returns, this annual study finds that international investors have tended to earn better returns from investing in stock markets in countries with weak currencies.

by London Business School, February 2006
Last Updated: 23 Jul 2013

Weak currency countries among 17 major markets produced US dollar returns 1.7% higher a year on average over the past century. A broader sample of 53 countries since 1972 found a bigger 8.2% annual return premium. While export-driven stock markets can still do well under a strong currency, exporters generally stand to benefit from earnings improvements under weaker currencies.

These higher earnings have also more than compensated for the reduced price-earnings ratios that tend to follow from weaker currencies and associated inflation. However, the currency kicker for earnings is more muted with less export-oriented economies such as the US, so investors are advised to seek out companies and sectors that stand to benefit from weaker currencies.

Source: Global Investment Returns Yearbook 2006
ABN-Amro with Elroy Dimson, Paul Marsh and Mike Staunton
London Business School, February 2006

Review by Steve Lodge

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