Chart of the week: is the hedge working?
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A feature of this year has been the weakness in the US dollar. As I write, it is down 11% over the last six months. This has impacted returns from US assets. Although the S&P 500 is up 5% year-to-date, in euro terms it is down 7% and the pattern is familiar.
The chart below shows the US dollar per euro exchange rate and the S&P 500 in euro terms during 2017, the first year of President Trump’s last Presidency. The US dollar was weak that year and this impacted on the returns, for a euro-based investor, from US equities. However, there was a change from the middle of the year. The US dollar kept weakening but the euro returns from the US market turned positive. One of the reasons behind this is the hedging that company earnings provide. About half of the S&P 500 earnings come from abroad, so a weak US dollar means higher earnings and a stronger equity market.
The same thing has started this year. Since the end of April, the currency has continued to weaken, earnings forecasts are getting revised up and the US equity market is outperforming the rest of the world in euro terms. We believe this pattern will continue.
