Most investors have experienced losses in their foreign stock investments this year. But performance for foreign stock markets has not been as poor as the headline numbers suggest.

This years losses are primarily due to currency fluctuations. The U.S. Dollar has risen nearly 10% versus major foreign currencies, leading to depreciation in foreign stocks and bonds. Strip away the currency effect, however, and the performance of most foreign stock markets has been solid, up more than 7% (chart).

We expect the dollar will continue to strengthen, but that is not reason to abandon international equity diversification. While the initial effect of a stronger dollar is to weigh on the value of foreign assets, a secondary effect may be to boost the economies of these regions through increased exports. Additionally, foreign equity markets today trade at a meaningful valuation discount to the U.S. based on a number of metrics.