“Hello David, I would appreciate your thoughts on international investing from the perspective of a U.S. investor. Currently it seems that valuations abroad and particularly in Europe and selected Emerging Markets - are compelling versus the U.S. However, with U.S. dollar strength and expectations of that trend continuing, do you anticipate the currency headwind negating the returns from an unhedged European investment? In the past I would typically have 35% or more allocated to international and that was profitable especially when the dollar was declining. It is a different environment today. I know Wisdom Tree offers several fully-hedged investments in Europe and Japan but the typical open-end mutual fund does not hedge as a matter of procedure and investors are left with the currency risk. Thank you in advance for your thoughts, I continue to enjoy the service. Regards,”

David Fuller's view

Thanks for a question of general interest to our US subscribers.

The US Dollar’s trend change is secular, marking the end of an approximately 40-year bear market.  Therefore you are well protected and presumably planning holidays to foreign parts of the world.  I have often said that it was only the Euro’s reserve currency status that was holding it up, but that has changed.  If Mario Draghi of the ECB gets his way, and I hope he largely does at the policy meeting later this month, the Euro could slide to $1.10 or even parity with the Dollar. 

To answer your question, I do think the currency headwind would negate too much of the returns from an unhedged European investment.  Therefore the fancy way to invest in Europe and the Asia Pacific region would be to borrow Euros and invest in India, China and European Autonomies.  However, your transaction costs would erode some of that hedging benefit. 

Unhedged, you may have a medium-term window of diversification opportunity if / when the Fed responds to protests from US exporters and temporarily curbs Dollar strength.  If you buy in Europe, I would focus on German Autonomies because if / when the Euro membership is reorganised, Germany and presumably much of northern Europe will be in the stronger currency group.  Additionally, I think you can invest in China and India, probably without too much currency risk.  Better still, there probably is or soon will be viable US funds, preferably closed-end, which invests in both China and India, and hedge the currency risks.