US based funds are therefore certainly worth investment whilst the QE2 commences and are likely to rise over forthcoming weeks.
The flood of US dollars onto the markets, however, has resulted in the weakening of the dollar which is likely to persist as QE2 continues its effects – this will have detrimental impacts on those funds priced in a foreign currency but invested in dollar denominated securities. With the dollar depreciating against their base currency, the value of dollar based investments to a foreign investor devalues, meaning those funds with an overweight position in dollar based securities are likely to lose out during this period of quantitative easing.
On the flipside, those funds based in dollars but invested in a foreign currency are likely to do well as the dollar depreciates.
Pegged to the dollar
Analysing currency effects further – a weaker dollar also means that those nations that peg their currency against the dollar, commonly emerging market regions, are likely to see an uplift in returns by their currencies following the dollar’s weakness, with their export products becoming more cost effective to foreign buyers. Their exports are thus more attractive on a global scale.
Latin American nations for example commonly peg their currency to the dollar and when peering into the Emerging Market sectors one notices Brazilian based equity funds being the top performers following QE2’s announcement.
The QE2 is likely to continue having positive effects on funds into the New Year and so one can expect investors and advisors alike to increase exposure to those sectors that will have the most positive impact on returns throughout this period.