International Investing: Currency Risk & Emerging Markets
Buy a foreign stock and you have made two bets, not one. The company is the bet you meant to make. The currency is the one that came attached, and in any given year it can be the larger of the two.
Two returns stacked on one holding
When you buy a Japanese stock, your broker converts dollars to yen and buys shares. When you sell, the reverse happens. So your outcome depends on what the shares did in yen and on what the yen did against the dollar.
The two combine multiplicatively, not additively. A stock up 10% in local terms while the currency falls 15% gives you 1.10 × 0.85 − 1 = −6.5%, not the −5% the subtraction suggests. The gap looks trivial here and grows with the size of the moves, because the currency applies to the grown value rather than what you started with.
Neither leg reliably dominates. Over long periods currency effects have tended to wash out, which is the case for not paying to hedge them. Over any single year the currency can easily be the larger term, which is why a good year for European stocks can still be a poor year for an American holding them.
(1 + local return) × (1 + currency move) − 1. Adding the two percentages is a shortcut that drifts on large moves.
What global market-cap weighting means
A global index like MSCI ACWI holds companies in proportion to their market value, across developed and emerging markets. Roughly a third of world equity value sits outside the United States, though that figure has fallen over the past decade as US megacaps outgrew everything else.
The appeal of weighting this way is that it requires no forecast. You aren't deciding how much America deserves — you're holding what exists, and the index reweights itself as prices move, with no rebalancing on your part.
This also means any deviation is an active bet, whether or not it feels like one. An American investor holding only US stocks has bet heavily on one country's continued outperformance. That may be right, but it should be a decision made deliberately rather than by default, and home-country concentration is the default nearly everywhere in the world.
Emerging markets: real differences, oversold story
Emerging markets are economies with faster growth and weaker institutional infrastructure — thinner disclosure, less predictable regulation, greater political risk, and occasionally restrictions on getting money out.
The pitch is usually 'faster GDP growth means higher stock returns'. The link is much weaker than it sounds: growth that is already anticipated is in the price, and rapid growth is often financed by issuing new shares, which dilutes existing holders. Countries have grown quickly for decades while their stock markets did poorly.
The stronger argument for holding some is diversification rather than growth. At roughly a tenth of global market cap, a global index gives you the exposure without a separate decision — while a large deliberate overweight needs a real thesis.
An unhedged foreign holding combines the local return with the currency move, multiplicatively rather than additively. Market-cap weights put roughly a third of global equity outside the US, and that share drifts on its own.
Sources
- MSCI ACWI (All Country World Index) — MSCI (2026)