The Weekly Strategy ReportContributor Multi-Asset Solutions
- As a greater share of corporate profits is generated from non-domestic sources, the performance of an equity market, relative to the global benchmark, can be dominated by movements in the country’s currency. The euro has strengthened since mid-April and the typically negative correlation between euro area equity’s relative performance and the euro has reasserted itself.
- While currency strength can act as a drag on corporate profits, the crucial driver of stronger economic growth provides an important offset. In recent weeks a slump in the earnings revisions ratio has vexed investors because the ratio can give an immediate read on the potential for a change in the more important, but slower moving EPS level. So far 2018 EPS estimates have been largely unchanged.
- Our overweight to euro area equities is accompanied by a preference for Japan and emerging market equities. All three should benefit from the backdrop of stable global growth, but they each provide essential diversification in terms of currency exposure.
EXHIBIT 1: THE CORRELATION OF RELATIVE REGIONAL EQUITY RETURNS WITH TRADE-WEIGHTED CURRENCY MOVES
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