Here’s an investing joke that turns out to be true. An Englishman, an American and a Japanese gentleman walk into a bar. They start talking about world stock markets over the past three years. Wot a recovery, the Englishman trumpets. Stocks have made back all their bloody losses and then some. To which the American responds: Get real, dude. It’s been a nice ride but I’m still down 25%. At which point the Japanese fellow bows slightly and informs his friends that the facts are regrettably not in complete accordance with their otherwise profound assertions. World stock markets are worth only about half of what they were three years ago.
Who’s right? They all are. How you see the market’s recent history depends on which currency you use to measure your results. The FTSE All-World Equity Index, on a total return basis, is now at all-time high in sterling terms because of the slide of the pound. In dollar terms, it’s 25% below its 2007 high and in yen terms it’s 44% below its summit.
John Authers, the investment editor of the Financial Times, thinks this “money illusion” may be one of the biggest factors factoring this market rebound. As he explains, people tend to think about investments in terms of their home currency. For British investors, the falling pound translates into big gains on foreign stocks. For U.S. investors, the picture is more mixed, while the recent rise in the yen has cost Japanese investors a small fortune on their foreign holdings. Each of these groups of investors has a different take on world stock markets, but their views have less to do with the markets than with currency fluctuations.
Freelance business journalist Ian McGugan blogs for the Financial Post