How Currency Can Impact Stock Market Returns

While the UK stock market did better in local currency terms in 2016, the US was a much better place for people's capital because of the rise in the dollar versus sterling

Dan Kemp 10 February, 2017 | 8:00AM
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Dan Kemp: Looking back at 2016, which stock market performed better, the U.S. or the U.K.? That's actually a more complicated question than it sounds. While the U.K. did better in local currency terms, the U.S. was a much better place for people's capital because of the rise in the dollar versus sterling.

And that currency impact is incredibly important to investment but is often overlooked. But really, investors need to think about currency exposure as one of the key elements of their portfolio.

This is particularly difficult because we also have to think about our liabilities which are typically are in our local currency rather than just the valuation characteristics of currencies around the world. While that's been difficult for U.K.-based investors in the past, it looks better as we look forward to 2017 because sterling, in our view, is one of the weakest currencies available to investors.

So, as we look forward, investors are able to expose themselves to sterling, which is a good value currency and also, meet their long-term liabilities which are typically in sterling as well. But we have to remember that currencies can stay at the wrong valuation for a very long period of time and correct only slowly.

And so, investors when thinking about currency, as with any other aspect of investment, should always be long-term focused. Short-term predictions are no better than fortunetelling.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA

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