Don’t Abandon Global Investing Just Because Dollar Is Strengthening | American Funds

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Global Growth | International | April 2015

Don’t Abandon Global Investing Just Because Dollar Is Strengthening

Some overseas holdings can benefit U.S. investors regardless of currency fluctuations

“Our analysts and portfolio managers factor in the potential impact of currency with every investment decision. If, for example, I look at a particular company and say, ‘This is going to be a great investment, but I’m going to lose it all on the yen,’ then I’m not going to make that investment. If I really think the yen is going to be weak, I’m going to find the investment that may lose some value in yen terms but do even better on the other side because its revenues go up 50%.”

Robert Lovelace
Robert W. Lovelace Portfolio Manager Los Angeles office 31 years of experience (as of 12/31/16)

Over the past decade, Toyota’s returns have been positive all six years the dollar strengthened

Chart highlights Toyota's returns for the last decade alongside changes in value of the U.S. dollar vs. yen.

Sources: Rimes, company filings.

Over the past year the U.S. dollar has strengthened considerably against the Japanese yen, euro and other currencies. While a strengthening dollar can dampen returns in overseas markets, it is not an indication that U.S. investors should abandon global diversification.

The fact is, currency is one of many factors that can impact returns. Market valuations, trade patterns, economic conditions and a company’s business prospects also play key roles in returns.

What’s more, in today’s global economy many companies conduct business in markets around the world, recording revenues and costs in many currencies.

Consider, for example, Toyota, a Japanese automaker with sales and operations in markets around the world. While a declining yen may provide a headwind to returns for U.S. investors, it can help the automaker sell more cars in the U.S. as they become more affordable to American consumers.

The chart shows that over the past decade, in each of the six years the dollar strengthened, U.S. investors saw their shares in Toyota rise in value. Toyota’s average annual total return in those six years was 26.7% compared with an 8.0% for the entire decade.

More recently, for the nine months ended December 31, 2014, a period when the yen slid 14.1% versus the dollar, Toyota’s profits soared 13.9% and U.S. investors saw the value of their shares rise 11.4%.

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