The Dynamics of Portfolio Management : Exchange Rate Effects and Multisector Allocation

The aim of this paper is to analyze the impact that recent changes in companies strategies (they refocused on their basic activities and they internationalized them) can have on their market value. Through that analysis, we intend to establish a suitable logic that could be adapted to portfolio management. This logic has to do with the first level of the top-down approach: it confronts multisector allocation to the exchange rate effects affecting company's market value.In the first part, we detail the basis of this three-dimensional logic. In the second part, we provide an empirical analysis of the French stock market behaviour between 1994 and 2004. Our analysis highlights the three-dimensional aspects of the pricing of French equities: (1) by confronting the position of the different French economic sectors to the US business cycle; in other words, we will determine if these sectors are lagging or early compared to the leading US cycle; (2) by taking into account their offensive, neutral or defensive behavior against the US market; (3) by taking into account the favorable or unfavorable fluctuations of the exchange rate and their influence on these sectors.The resulting taxonomy that we confront to the different phases of the US business cycle allows us to define the basic principles of a multisector allocation, which governs the strategic choices to be made for investment portfolio