With a majority of developed markets rallying strongly over the last several years, we think the single biggest determinant for investors actually being able to capture those returns has hinged on their ability to manage currency risk.
There is recent evidence that Europe is becoming more Japan-like in displaying negative correlations between its equity markets and its currency moves. This negative correlation in Europe is not a new phenomenon:
When investors buy Japanese equities, they don’t really buy a slice of that economy; they buy shares in corporations that operate both in Japan and around the world. “Japan, Inc.” (i.e., Japanese corporations) is showing a profit picture that differs dramatically from the country’s economic growth rate.
The recent bout of aggressive monetary policy easing by the Bank of Japan (BOJ), combined with the direct purchases of equities by the Japanese Government Pension Investment Fund (GPIF), has brought on a new period of positive sentiment toward Japanese equities.