In recent months, I have made no secret of the fact that I do not expect much from the performance of US equities in the coming months. Equities there are overvalued - especially in comparison to European securities - and a further rise is therefore unlikely. I have already presented some factors that underpin this, such as demographics and government debt ratios. Today we will look at another important aspect: The exchange rates of the respective currencies.

Long-term studies show that exchange rates are linked to a country's relative economic performance. During the 130 years from 1820 to 1949, i.e. from the global start of industrialization to the period after the Second World War, the share of British economic output in the global economy was around ten percent. The exchange rate of the British pound against the US dollar was also largely stable. However, with the outbreak of the First World War in 1914, the first fluctuations began. After the end of the Second World War, which was very costly for the UK, the pound fell by almost 75 percent from 1947 onwards. Since then, the country's relative economic performance has fallen by 71 percent. The Chinese yuan has experienced the opposite development in the recent past. While China's share of the global economy grew strongly between 2005 and 2015, the value of the yuan also increased in comparison to the US dollar (2005: 8.18 yuan, 2015: 6.29 yuan). This correlation is also confirmed for Japan and the eurozone.

This is mainly due to the fact that a strong economy attracts more capital. So if the US economy is booming, more money flows into the US dollar, which in turn weakens the euro. However, investors can also be tricked by bogus bubbles. This can be observed time and again in the USA in particular. From 1983 to 1986, then US President Reagan accepted average annual government deficits of five percent of national income in order to keep the Soviet Union at a distance militarily after its invasion of Afghanistan by increasing arms spending. US goods became too expensive due to the inflated dollar exchange rate. From 1985, investors became aware of this and the dollar depreciated. In 2000, many believed that the internet boom of the 1990s was a permanent phenomenon. This was not sustainable either; the US dollar, which had risen in the meantime, fell significantly in the following years. Currently, the AI fantasy, but also the enormous new borrowing by the US government (an average of nine percent of national income per year since 2019), are significantly brightening the picture compared to the sluggish Europe - however, such high borrowing is not sustainable either. Realistically speaking, the US dollar is therefore overvalued and its exchange rate is likely to fall significantly over the next ten years.

This is interesting for the equity markets because the past bubbles were always followed by an appreciation of the euro and yen against the US dollar. Stronger currencies also lead to stronger capital inflows, which in turn lead to stronger equity markets. Over the next ten years, the European and Japanese equity markets are therefore likely to outperform the US market.

Capital market outlook