Financial analysts say that now is the optimal time to invest abroad — while the dollar is weak.
That’s because as the value of foreign currencies rise against a falling dollar the return on foreign investment increases.
The U.S. dollar lost more than 12% of its value against a host of foreign currencies since January 2017.
Foreign investment exposure against a weak dollar can offer critical opportunities, investment diversification and inflation protection.
“Foreign investments tend to do better when the dollar is weak,” said Jack Ablin, chief investment officer for Cresset Wealth Advisors.
“When you invest in foreign stocks, you’re actually buying two things — the foreign equities, but also the foreign currencies needed to buy them.”
Consider European equities. Owned by Americans, they can be a boon against the falling dollar.
In fact, investment in European stocks have offered returns of more than 18% over the last year for U.S. buyers.
The weakening dollar is the fuel for appreciable investment returns, says Harry Hartford, president of Causeway Capital Management.
“On the one hand, if the dollar is weakening versus the euro or the yen or the Swiss franc, the value of your foreign investments is going to go up just on the currency alone,” Hartford said.
Robert Arnott, chairman and chief executive of Research Affiliates, concurs.
Arnott believes that emerging markets are a good buy against the weak dollar. “I look on Europe as a bargain and the emerging markets as a bargain,” Arnott said.
“I’m perfectly happy about non-dollar investments because they are cheap and the U.S. stock and bond markets are not.”
Emerging markets too
Emerging markets also benefit from inflation tied to the falling dollar. Increasing inflation hits consumer good companies in the developed world harder.
Emerging economy companies, meanwhile, are usually manufacturing related. Foreign investments thus can act as a buffer against inflation if the dollar falls too far.
“One of the most underappreciated reasons for foreign exposure comes with currency. The foreign currency you get from owning foreign stocks provides investors with a hedge against inflation,” said Brian Singer, a portfolio manager with the asset manager William Blair.
Ben Inker, head of the asset allocation team at GMO, believes that international portfolio diversification is a good bet against risk — especially against a falling dollar.
“Owning a globally diversified portfolio opens you up for less risk of a really bad outcome,” especially over long period of time, Inker says.
Ablin says that those looking to invest abroad against the weak dollar should start out small.
International investors should focus on small companies abroad whose profit margins are not dictated by further declines in the dollar.