It’s not exactly groundbreaking research, but PIMCO’s Mark Taborsky and Sebastien Page just released a well-constructed chart illustrating the outperformance of the carry trade versus the S&P 500 in the last decade.

Although the carry trade – in this case defined as going long a basket of high-yield currencies against a basket of low-yielding ones   doesn’t have a ‘natural return’ by definition like stocks, it’s a passively-managed portfolio that has consistently provided investors with positive returns over the years.

width=630

Currencies can be “a potential source of alpha,” stated Taborsky and Page.

Of course, they pointed out that the carry trade can experience large down swings, so it’s not a ‘free-lunch.’ 

These large declines coincid with those of the S&P 500 because the carry trend is essentially a function of risk-appetite, i.e. fears drive investors out of high-yielding currencies into ‘safe-haven’ low-yielding ones like the Japanese yen.  As that happens, investors who have the carry trade on suffer (sometimes large) losses.

Nevertheless, if one believes the global economy has stabilized and the chances of renewed global risk aversion is low, a carry trade may be a better strategy of getting exposure to global economic recovery compared to buying US stocks, which is subject to the (potentially weak) growth rates of the US economy.

Moreover, the forex market offers more flexibility when it comes to leverage, especially for retail investors. 

Email Hao Li at hao.li@ibtimes.com

Click here to follow the IBTIMES Global Markets page on Facebook.

Click here to read recent articles by Hao Li.