Global stock markets can deliver robust returns despite FX swings: study

Thu Jul 30, 2015 10:16am EDT
 
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LONDON (Reuters) - Investors allocating funds across global stock markets can earn an average return of up to 12 percent a year despite currency swings, a study showed on Thursday.

The study -- by the Cass Business School, the Bank of England and City University Hong Kong -- used data from more than 40 stock markets, observed over 30 years.

It found very little erosion of returns as a result of movements in exchange rates.

"This leaves significant returns available to investors allocating money across global stock markets when returns are measured in an investor's home currency," the Cass Business School said.

"(Conversely) the result also means that predictable movements in stock markets are of no use in predicting exchange rate movements."

In recent years, movements in currency markets have often led to sharp moves in global stock markets. For example, in Japan, a steady drop in the yen JPY= as the Bank of Japan delivered a huge monetary stimulus program drove the benchmark Nikkei .N225 to record highs.

Similarly in recent months, a drop in the euro EUR= as the European Central Bank embarked on a 1 trillion euro asset-buying program has boosted European stock markets .FTEU3.

Most investors allocating funds across assets and global markets tend to hedge their exposure so that sharp and sudden currency swings do not eat into their returns.

The study, published as a BoE working paper, showed that the relationship between stock market returns and currency returns was virtually zero.   Continued...

 
An employee looks at monitors at the Tokyo Stock Exchange (TSE) in Tokyo June 29, 2015. REUTERS/Thomas Peter