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Global stock markets can deliver robust returns despite FX swings: study
[LONDON] Investors allocating funds across global stock markets can earn an average return of up to 12 per cent a year despite currency swings, a study showed on Thursday.
The study - by the Cass Business School, the Bank of England and City University Hong Kong - used data from more than 40 stock markets, observed over 30 years.
It found very little erosion of returns as a result of movements in exchange rates.
"This leaves significant returns available to investors allocating money across global stock markets when returns are measured in an investor's home currency," the Cass Business School said. "(Conversely) the result also means that predictable movements in stock markets are of no use in predicting exchange rate movements."
In recent years, movements in currency markets have often led to sharp moves in global stock markets. For example, in Japan, a steady drop in the yen as the Bank of Japan delivered a huge monetary stimulus programme drove the benchmark Nikkei to record highs.
Similarly in recent months, a drop in the euro as the European Central Bank embarked on a 1 trillion euro asset-buying programme has boosted European stock markets.
Most investors allocating funds across assets and global markets tend to hedge their exposure so that sharp and sudden currency swings do not eat into their returns.
The study, published as a BoE working paper, showed that the relationship between stock market returns and currency returns was virtually zero.
"The punchline ... is that if, for example, you are confident that the Japanese stock market is going to rise relative to the UK stock market, this tells you nothing about movements in the yen relative to the British pound," Richard Payne, one of the authors of the study said.