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International Investments

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International Investments: Emerging Currency Opportunity

By Gary Scott

Recent messages have looked at how currency turmoil can enhance your wealth. We saw that the Canadian dollar, Danish and Swedish kroner may be good major currencies to hold at this time.

How about emerging currencies? Should we invest in them as well? The answer for many of us is assuredly yes. But which?

Emerging market currencies offer much greater opportunity than so called major currencies, but they also contain increased volatility and risk.

Jyske Bank’s recent currency analysis shows us why when it says: “American inflation data puts renewed pressure on the emerging markets. Consumer prices grew by 3.5% and these numbers sent US and European yields up. The yield on 10-year American T-bonds is currently at 5.15%, compared with 5.10% before the release of inflation data. The yield on 10-year German bonds is now at 4.07%, compared with 4.00% before the release.”

The statement shows that a rise in major market yields puts stress on emerging currencies. Why?

The answer is most major currencies are perceived as being safer than emerging currencies.

This is the opportunity. Perception does not always make sense.

For example, in our major currency analysis we saw that the US is deeply in debt, has a slow, growing economy and a huge current account imbalance, plus numerous other factors (war, aging population, higher social costs, hurricanes, etc.) that suggests that the greenback will continue to drop. The economic backdrop of the last thirty years has been of a declining US buck! However the majority of the world still thinks of the US dollar as the reserve currency, with many other debt ridden (especially the Japanese yen and euro) as the other stable currencies.

Yet there are numerous emerging countries with fast growing economies, no debt and big surpluses. Logic dictates that these are the currencies that are stable. However, markets are rarely moved in the short term by logic.

Thus financial markets think that emerging currencies contain greater risk and must pay a risk premium in the form of higher interest rates than major currencies. So short term interest rates on the Russian Ruble are 12%, Indonesia Rupiah 13%, Turkish Lira 14% and Brazilian Cruzero 15%.

Sometimes this risk premium is not enough.

According to Jyske Bank, emerging-market currencies have been under pressure since the end of February 2006 even though they pay much higher interest.

We can gain opportunity by knowing this. Times of turmoil and weakness are when the markets are most likely to discount emerging currencies. Often these currencies have a history of weakness, and pay high interest rates, also now also have strong fundamentals. Smart investors look for currencies with high interest and strong fundamentals.

Take Turkey and its currency the Turkish lira (TRY) as an example. Turkey has a booming economy, sits in a strategic part of the world and stands to gain enormously by entering the European Union in a decade or so. This entry into the European Union will force Turkey to increase its fiscal discipline which could create a stronger currency. Yet recently the TRY has depreciated by 6% versus the euro.

This could mean that the TRY offers a good deal (I think so and just put 5% of my portfolio into TRY bonds that pay me over 10%).

The current nervousness in the emerging markets may create opportunity. Therefore, it is worth keeping an eye on economic indicators and announcements that may change interest rates in the US, the euro zone, Japan and Switzerland. Furthermore, country-specific circumstances may cause further movements in the emerging markets (see Turkey below).

Emerging equity markets have offered better returns for the past five years running. The opening of emerging nations (not the building of the US and Europe) are now the driving force of the global economy. Based on this I believe that emerging currencies will recover and rise.

This does not mean to jump in right now. I have made a limited move in the direction of emerging currencies, but I have no liquidity restraints. I have no time line for profit and I have 30 years of experience in feeling comfortable with emerging currencies.

I am often ahead of the pack which means sometimes I gain a little extra profit. This also means that there are times when my losses are greater so I also sweat a bit more. For example, the drop of the Lira means that my portfolio will take at least a temporary hit. If I were not prepared emotionally, financially and liquidity wise, this could hurt.

Jyske Bank still maintains a HOLD recommendation for bonds denominated in emerging currencies, and feels that volatility is still high. This hold may continue well into June when the bank reviews the outcome of the US job reports for May (2 June), the next inflation data from Turkey (2 June) and the result and comments from the next ECB meeting (8 June). Jyske is extremely experienced in this field. Jyske Invest Fund Managers were recently awarded best performing European Equity Fund manager by Global Investor magazine. In rankings calculated by Morningstar (based on realized return versus risk over three year period) the 33 Jyske Invest funds were awarded 3.7 stars of 4. You can get more information on Jyske’s view of emerging markets from Thomas Fischer at

So from now to June we’ll be looking at some emerging currencies to see if we can find any that offer high interest and opportunity for appreciation.

Enhance your profit potential with a diversified portfolio of emerging currencies through a MultiCurrency Sandwich. LEARN HOW

Learn about investing in emerging currencies, gold, silver, Ecuador, import-export, overseas markets and more. Join Merri and me at our September 15-16-17, 2006 International Business and Investing Made EZ course in North Carolina. Review where to invest and do business now and learn which markets and currencies may be strong in the year ahead. Our May course was overbooked and the September session is already filling up fast. Our free accommodations are reserved on a first come first served basis so do not delay! DETAILS

May, 2006


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