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
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
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
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
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
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