Posted inEquitiesEuropeUnited States

The dollar will get stronger, just look at the expensive stocks!

This is the quite remarkable conclusion of research conducted by Joachim Klement, chief investment officer of investment consultancy Wellershoff & Partners in Zurich. It is focused on stock markets in the US and Europe and shows that the dollar is set to appreciate versus the euro in the subsequent five years when the cyclically-adjusted P/E ratio (CAPE) of US stocks is significantly above the long-term average, and vice versa.

The result is surprising, as one would rather expect the opposite: investors leaving an expensive market (US) and buying a cheaper one (Europe), thereby exchanging their dollars for euros.

 

 

“I didn’t expect this result at all,” Klement concedes. “If you see a currency depreciation, such as we’ve seen in Europe this year, earnings should start to edge higher because of higher exports, and the CAPE should decline,” he adds. “But in fact the opposite happens, I think because investors are overshooting. This is what has been taking place in Europe this year, as P/E ratios are now higher than in the beginning of the year, though earnings have started to pick up.”

Part of the Bonhill Group.