International Investments - Emerging Even Wilder

By Gary Scott

The fall of emerging market currencies has created real losses in the last several weeks. Some really excellent opportunities should be forming. However, currency markets have probably not stabilized yet. The global investing community seems to be shifting values and risk aversion is more in focus then positive carry.

Fundamentally, economies have not changed, just the focus. Emerging markets had been feeding off liquidity created in Europe (to finance the absorption of Eastern Europe), Japan (to revise its failing economy) and the US (to keep the economy buying). Now the US, Japan and Europe are loaded with debt and investors have become nervous about how long this inflationary show can go on.

We started writing about the Borrow Low Multi-Currency Sandwich in the 80s, so our readers have enjoyed positive carry for decades. Finally when the Wall Street bubble of 1999 burst, global investors caught on to this idea and emerging currencies really took off.

Now the bubble is in trouble and the market's focus on positive carry has all but vanished. Instead investors appear to be looking at the problems of US debt and the US current account deficit. The fear is if the US dollar collapses so too will emerging countries.

Current accounts are in focus, and currencies in countries with large current account deficits (such as the US) are weak. The emerging currencies that have depreciated most in 2006 are those of countries struggling with current-account deficits. In these terms here is a list of the emerging countries with the best ability to create current account surpluses (best first):

Singapore
Russia
The Philippines
Taiwan
Argentina
Brazil
South Korea
Chile
Ukraine
Indonesia

The countries below are less likely to have a balanced account (worst last):

Mexico
Colombia
Ecuador
Thailand
Poland
Czech Republic
South Africa
Australia
Turkey
New Zealand
Hungary
Slovakia
Bulgaria

Big changes of this nature create new fields of potential profit and here is what Jyske Bank now recommends. “In general, one should watch one's step in the turbulent market. It is important to pick your investments carefully - to go cherry-picking - so as not to end up shipwrecked without a lifebuoy. We recommend investors to go for countries without current-account deficits and choose BRL, for instance, rather than TRY. Also, investors might consider taking positions in the commodity-related currencies NZD and AUD. Admittedly, both New Zealand and Australia are running current-account deficits, but this is outweighed by their being commodity suppliers, and NZD and AUD are still at historical lows against the dollar.”

Investments in emerging currencies should be balanced with investments in strong major market currencies. On the subject of commodity suppliers, I have always liked small population countries as places to invest. Hong Kong, Singapore, Switzerland were my favorites for years (not now). So it is not surprising that Canada, Denmark and Sweden ended up as being the three strong major currencies in our recent review in these messages. All have small populations.

It is even less surprising that Norway is doing well also. The Norwegian economy is booming. This tiny nation is oil rich. There are no indications that things will slow down either. Inflation is still modest and far below the Central Bank’s target of 2.5%. The bad news is this means interest rates are still at a historically low level.

However because investors are so worried at the moment, the Norwegian kroner could boom. Due to its oil and Norway's strong credit rating the kroner could replace the Swiss franc a safe haven currency, especially because it has such a strong current-account surplus.

Here are some Norwegian bonds currently available:

The Canadian dollar, plus Norwegian, Swedish and Danish kroner are solid currencies to hold especially as a balance to the higher yielding emerging currencies. You can get more information about investments in Norwegian kroner from Thomas Fischer at fisher@jyskebank.dk

Learn about investing in emerging and major currencies, gold, silver, Ecuador, import-export, overseas markets and more. Join Merri, Thomas Fischer from Copenhagen and Steve Marchant from Ecuador 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. Learn more about Ecuador import and export from Steve. Our May course was overbooked and the September session is filling up fast. Our free accommodations are reserved on a first come first served basis so do not delay! Go to garyascott.com/catalog/ibeznc.html.

Our last course was extra personally satisfying because one delegate had been at one of my very first courses in the US over 30 years ago. Another had been to our Isle of Man course about 20 years ago and one delegate was at her fifth consecutive course in a row! The fact that delegates come again and again is most fulfilling. Here is what two more delegates said about this last International Investments and Business Course.

“Hi, Merri and Gary! Just wanted to drop you a note to thank you for your hospitality at Merrily Farms last week. I really enjoyed listening to your philosophy on investing in other currencies and cultures while identifying distortions in the marketplace. The mix of other folks with similar interests was outstanding! I made so many friends and returned totally relaxed!!! I must admit it has been very difficult to concentrate on my daily chores these days because I keep hearing your voices and thinking about your perspectives as I go through my routines. I feel renewed in my desire to expand my financial and professional horizons, and I am grateful for the opportunity to ‘think outside the box’ with regard to import/export opportunities. The very best to you both – I hope to return for another seminar soon! – Pat”

“Hi: Gary & Merri: After a long drive, a couple of stops and a visit with my daughter, I have finally arrived back in Michigan. A bit weary, but satisfied. Enjoyed your seminar and all the beauties of your location. May I thank you and Merri for the whole experience. We shall be considering your future offerings. Peace and regards, Jerry”

Gary