More Problems Emerge in Multi Currency Market

by | Aug 27, 2013 | Archives

More Problems Emerge in Multi Currency Market.

Our multi currency message entitled Important Multi Currency Shift of two weeks ago said: We can see a huge multi currency market shift  in this Emerging Market Value Update.   There was a huge value shift of global stock markets in 2010.

Prior to the 2010 shift we weighted our recommendations toward investments in emerging markets.  They enjoyed faster growth than developed markets.  Then in 2010 we warned that values had flipped.  Developed markets offered better value than emerging markets.

Now the values have flipped again.  This update suggests that this is a good time to take profits on over weighting of developed market shares and to re calibrate one’s portfolio to an over weighting of emerging market shares.

See what that emerging market news means for this share Riocan REIT.

REIT

Up 112% since

REIT

The year’s drop in this share price creates value and a high yield.

Both images from www.ca.finance.yahoo.com

We can see the continued revaluation of emerging markets in the weekly market update at Jyske Global Asset Management which says:

Turmoil in Emerging Markets

Paradoxically, the prospect for an improving US economy, and the thereof scaling back of the extraordinary monetary measures is exhibiting the weaknesses in the Emerging countries – causing investors to flee.  

Since May, international investors have reduced their exposure to emerging markets in expectation of an imminent scaling down of QE (Quarterly Earnings).  The selloff culminated this week where especially India and Turkey got severely hit with plunging currencies and surging bond yields, bringing back memories to the Asian financial crisis in 1997/98.

In India, the rupee plunged to a record low and benchmark Indian bond yields surged to a 12-year high in a panic-response to last week’s limited domestic capital control.

India’s large current account deficit and inability to introduce substantial economic reforms have made the rupee especially vulnerable to capital outflow. Since May, the Rupee have depreciated almost 20% versus the US dollar.

Eric Roseman at ENR Asset Management, who will take over the management of the funds held by American investors at Jyske as of September, also noted the potential emerging problems in his August Outlook.

A growing conflict in Egypt risks tipping the Middle East into a wider conflict, possibly threatening Iran, Iraq, Turkey and Israel. The United States, thus far, has failed to contain the Egyptian crisis. U.S. foreign policy failure holds the cards for possibly re-balancing the actors in the Middle Eastern theater, if Egypt slides deeper into political turmoil and distances itself from the United States.

From a regional perspective, the major markets continue to offer lower relative volatility than the emerging markets and we continue to overweight advanced economies in 2013; India’s deepening economic crisis is another dose of bad news for emerging markets.

This suggests that long term opportunity is building in emerging markets.

For shorter term, especially for investors who require income, high yield shares in major markets still make sense.

Eric also wrote:  Our asset allocation still favors high quality equities that mostly pay dividends.

We still recommend Colony Financial (CLNY) sporting a yield greater than 7% and trading at a 13% discount to book-value.

Riocan REIT (REI. UN), Canada’s largest commercial REIT, has fallen sharply but trades at incredible values at this price. Riocan sells at a 52-week low, trades at 7.9 times trailing earnings and yields 5.86%

For more details, American investors should contact Thomas Fischer at fischer@jgam.com

Other Investors contact Henrik Boellingtoft at Jyske Private Bank at Henrik.boellingtoft@jbpb.dk

 Which to choose?

So where should one invest, in emerging markets or good value high yielding shares like Riocan?

My reply to the reader’s question below should help answer this question.

Gary,  Your recommended stock, Hyflux, has done poorly since your call. Unfortunately, I own it.  Do you still like it??  I know emerging market stocks are down; perhaps this is in sympathy.

My reply:  Yes, we have this in our portfolio as part of our long term growth strategy.

There are three negative elements at this stage.  One is the overall emerging market downgrade.  Singapore can hardly be called an emerging market but its main business is in emerging markets.

The next negative is the strong US dollar.  Over the last year the greenback has risen versus the currency in which the Hyflux shares are denominated.  

singapore dollar

US dollar rising against Singapore www.finance.yahoo.com chart

This to me creates extra value because the fundamentals for the Singapore dollar are strong and for the US dollar weak.

US GDP Growth last year 1.4%

Singapore GDP Growth last year 3.8%

US current account balance for last year  -$425 billion or -2.7% of GDP

Singapore current account balance for last year  +$49 billion or +19% of GDP

US Budget Balance as % of GDP for last year -4.5%

Singapore Budget Balance as % of GDP for last year +0.7%

US Unemployment  7.4%

Singapore Unemployment  2.1%

US$ Interest Rate 10 year bonds  2.71%

Singapore $ Interest Rate 10 year bonds 2.45%

This is a classic indicator that it is a good time to borrow US dollars and invest in Singapore dollars.

Third, Hyflux has substantial investments in the Middle East and I believe this has been detrimental. However they are good managers and also are in China and both China and the Middle East need water… so we continue to hold for the long term.

However note in our personal portfolio breakdown that this only represents 2% of our holdings.  We see this as a long term capital opportunity, but you should work with a financial adviser to see what portion of your portfolio should be geared to income and what part capital appreciation. You could also plan what portion of your investments should be dedicated to short, medium and long term growth based on your financial position and needs.

Multi currency subscriber can see our 2103 portfolio breakdown at our password protected site.

Gary

Get a password and our multi currency portfolio report (normally $79)  free when you enroll in our October or February Investing and Business course.

Learn about the Singapore dollar breakout and when breakouts earn the greatest profits.

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