International investments in emerging market equities have been one of the best ways to combat inflation and protect purchasing power over the past five years. Emerging international investments can be leveraged through loans with low interest rates.
This series looks at how to attain international investments with borrowed Czech koruna as this currency may be a good one to borrow at this time. The koruna has risen to a very high level versus the euro which is the benchmark currency of that region. The interest rate of the koruna is low and there are many economic fundamentals in the Czech Republic that suggest it will dip versus the euro.
Yesterday’s message Czech loans invested in a basket of major European equity markets. That portfolio has potential of 67.04% annual appreciation. This message looks at a portfolio based on a Czech koruna loan invested into a highly diversified basket of emerging equity mutual funds denominated in mixed currencies.
This Czech financed multi-currency portfolio has greater capital appreciation potential but increased risk of capital loss so we will use lower leverage (2 times) as we did in yesterday’s message than the previous bond portfolios used (4 times).
This portfolio assumes that we invest $100,000, borrow $200,000 in Czech koruna and invest $50,000 in each of the six equity mutual funds below.
Fund Increase Last Year
|US$||Jyske Invest India Equity Fund|
Jyske Invest Far East Equity Fund
Jyske Invest Eastern European Fund
Jyske Invest Latin America Equity Fund
Jyske Invest China Equity Fund
Jyske Invest Emerging market Equity Fund
There is no way we can predict how much this portfolio will grow, if it will at all. Past performance is no guarantee of future growth but all we really can do is see what would have happened had we held this portfolio last year.
This portfolio has an average return of 46.25% less the 3.875% on the $200,000 loan. With the leverage, this portfolio would have grown $138,750 last year. The loan cost would have been $7,500. The growth left after the loan cost would have been $131,250 or 131.25% appreciation of the original $100,000 investment.
This portfolio has almost twice the profit potential as the major equity portfolio, but also has more potential for volatility.
This portfolio though well diversified currency wise also has far more forex risk (and opportunity) that yesterday’s which was strongly linked to the euro and koruna.
This portfolio would have suffered some reduction in appreciation last year due to the rise in the parity of the Czech koruna. However now that the koruna is at an all time high versus the euro, the chances of a forex profit from a koruna dip are enhanced.
Each of the portfolios we have reviewed in this series is based on an idea.
The idea behind this portfolio is that if the global economy continues to grow, so too will equity markets. The best performing equity markets of the past five years have been emerging markets. This idea is founded in the reality that poor nations such as China, India, and those in Asia and Latin America have embraced capitalism and are catching up.
This is a well diversified portfolio with some chance of a forex and capital gain or loss. There are risks in every type of portfolio. The big risk in this portfolio is that global markets are overheated and that there could be a reduction in share prices in Europe and around the world. A drop in Equity markets would increase the chances that the price of these mutual funds would fall and create a capital loss. Never leverage more than you can afford to lose.
You can gain more details from Thomas Fischer at fischer@JBPB.com
Our Borrow Low-Deposit High Multi-Currency Sandwich Educational Service tracks five multi-currency portfolios so we can learn from their rises and falls. The emerging markets portfolio we track is leveraged in Czech koruna. You get a free 16 page report on economic conditions for 2007 when you enroll in our Borrow Low-Deposit High Multi-Currency Sandwich Educational Service. Subscription is $149 for a year. Details are at https://www.garyascott.com/catalog/bldh/
You can finish this message and see pictures of incredible Ecuador real estate and good food at https://www.garyascott.com/international_investments/177.html
Until next message, good global investing!
P.S. Join us in the Ecuador sun this winter. Here is a schedule of the courses Merri and I will sponsor and or conduct.
Feb. 20 – 25, Tues.-Sun. Import-Export Course.
Mar. 9 – 15, Fri.-Thurs. Expanded Super Thinking + Spanish.
Mar. 16 -18, Fri.-Sun. International Business and Investing Made EZ.
Mar. 19 – 21, Mon.-Wed. Andes Extension & Real Estate Tour.