Asset markets are funny places to shop for investments. They are inanimate objects with personalities. Stock markets, for example, move together. They rise most when other stocks rise. They fall when other stocks fall. They are herders. Bond markets are worldly wise. They price on cash returns. This is a personality of stand-offishness.
My advice to you? Look into currency markets to find healthy stock markets to invest in.
Currencies are joiners. They gather in groups and pal around for periods of time. One dominant cause driving a set of currencies creates a group. Since currencies hang out in groups, comments like “do you like a weak dollar or a strong dollar?” don’t make sense. Each currency pair has its own logic. At best, that logic follows along with a group of like-minded currencies. There are always currencies that are ‘weak’ against the U.S. dollar. Others are ‘strong’ against the U.S. dollar at the same time.
To better understand an investment’s broad drivers, look through these FX groups…
The Rates Group – Over the next 12 months, Euro, Pound and Yen currencies should get weaker as the U.S. dollar gets stronger. The U.S. economy is moving ahead and will get some braking from higher rates. Continental Europe struggles to gain as much traction. That keeps Continental interest rates down. In the case of Japan, and perhaps the U.K., their governments flatten domestic rates.
The Commodity Group – Oil prices are falling. Copper prices are off. Other metal prices show slight price recoveries. No currency in this group gets a strong bid. Canada, Chile, Norway, and Australia find themselves here.
The Relative Growth Group – Relatively stronger GDP growth often results from relatively better labor costs. Next year, big manufacturing countries (China and Mexico) could see strong capital inflows appreciate their currency. This benefits Chinese renminbi and Mexican Peso denominated stocks. However, in this relative growth group, the biggest mover may be the Brazilian real. Brazil has been losing the relative growth race. Its monetary government is trying to help GDP catch up. A weaker real helps Brazil’s domestic producers exposed to global competition.
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The Responders Group – Last, we find economic managers who struggle against aggressive management in the above groups. Countries like Switzerland, India, and Indonesia face volatile capital inflow and outflow issues that can throw currencies off track.
With that background in hand, study this Currency state of play for stocks.
(1) Where non-U.S. Stocks Win, but Local Companies Lose
(2) Where non-U.S. Stocks Lose, but Local Companies Win
(3) Toss-Up Currencies
Currency groups offer us the underpinnings in global change. In one instance, we see a labor cost advantage between China and Mexico vis-à-vis the USA. How? Because portfolio and investment capital flows produce a signal in terms of a strengthening foreign currency. In another instance, a call for higher interest rates in the USA versus Europe is being telegraphed by a weakening foreign currency. If U.S. rate movement accelerates in 2014, be prepared for a big debate. This will be a watershed event for stocks, bonds, and currencies.
The Brazilian real offers a nice closer. In 2010, it was the finance minister of Brazil who called this landscape the “currency wars”. Brazil’s currency (like so many others) is managed to the hilt. The socialist government wants to restore growth. Brazilian shares benefit when the right currency balance is struck. The truth is that the biggest underpinning to global change remains heavy intervention.
What shares look interesting in the current currency landscape?
Where flows of capital increase enough to move up currencies — Mexico and China — is a great place. The other great spot would be a Brazil. Invest in a broad growth turnaround led in part by a currency move. The finance minister has your back. Pick a strong Zacks Rank country ETF, particularly with good exposure to consumer-led growth.
Or find a Zacks Rank #1 non-U.S. stock that has a revenue growth story. Make sure it’s exciting and moving forward, and able to attract new investors on its own. The global macro currency tailwinds must feed an already improved company outlook.
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John Blank, Ph.D., a noted global economist, is Zacks’ Chief Equity Strategist. He leads an exclusive investor group to the world’s most exciting investment opportunities with his new International Trader portfolio.