Going Global With a Hedge

By Salvatore Bruno via Iris.xyz

With US equities continuing to swim near all-time highs this summer, many investors are seeking growth opportunities in other markets. The great news is that international equities offer a variety of benefits, including positive growth forecasts for 2018, highly attractive valuations, and a dividend yield that is currently as much as 50% higher than yields of many US equities. With all those factors at play, it’s no wonder flows into non-US equities have continued to skyrocket.

However, as any experienced investor knows well, international equities also introduce a hazard that has the potential to thwart even the greatest investment opportunities: currency risk. Because the US dollar and the euro together comprise about 40% of the world’s Gross Domestic Product (GDP), the dollar-euro exchange has an enormous impact on global asset prices. At the same time, that exchange rate has demonstrated a highly uncomfortable level of volatility, fluctuating by about 20% a stunning eight times in the past decade alone. Combine that reality with other currency-related risks, such as the ever-changing economic fundamentals of foreign nations, inflation levels, interest rates, and central bank policy, and the potential for foreign exchange volatility is huge.

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