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Looking for a simple way to outperform the market on your international equity
index portfolio? Here’s how.
So say edited excerpts from a post* on soberlook.com originally entitled This simple trading strategy points to rationale for currency wars.
[The following article is presented by Lorimer Wilson, editor of www.munKNEE.com and the FREE Market Intelligence Report newsletter (sample here) and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
The post goes on to say in further edited excerpts:
Here is a simple algorithm from JPMorgan (warning: do not try this at home).
- Select two countries with the worst performing currencies (against USD) over the past 4 months and go long equity indices of those two countries.
- Now select the two best performing currencies and short the indices of those countries (to the extent that’s possible).
- Repeat the exercise once a month.
If you back-test this simple strategy, you get the following excess returns.
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| Source: JPMorgan |
Hard to believe, right? While, obviously, there is friction in shorting equities of certain countries and the “actual returns may vary” it does tell us that currencies drive equity returns for many nations and the explanation seems to be tied to exports.
- Exporters’ shares and firms that support them…perform better when a nation’s currency is weak while, conversely,
- strong currencies make exports more expensive, creating drag on revenue.
Take India for example. After the rupee took a massive beating this summer… inflation picked up and the economy slowed yet SENSEX, the broadly watched stock market index, is now at a 3-year high.
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| Source: Econoday |
This simple strategy therefore points to the rationale for “currency wars”. Want a stronger stock market in the next few months, weaken your currency. You may end up with other problems, such as inflation, but the stock market should do well.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://soberlook.com/2013/10/this-simple-trading-strategy-points-to.html (Content copyright 2009-2013. SoberLook.com. All rights reserved.)
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