In recent days, investors might not have noticed a very
unusual trend playing out in global markets. A number of
once-robust currencies are in freefall against the U.S. dollar --
and counterintuitively, that spells opportunity for U.S.
Looking For A Bottom
From the South African rand and the Brazilian real to the
Australian dollar, a worldwide slump is emerging. It's very
unusual for currencies togain or lose value in a rapid fashion,
but the recent charts are quite humbling, as this chart of the
Australian dollar shows.
For U.S. investors with exposure to these markets, thecurrency
shift eats away at astock orfund 's value, which comes on top of
existing weakness in many foreign markets when denominated in
their own currencies. For example, the
iShares MSCI AustraliaIndex Fund ETF (
has underperformed the S&P 500 by a stunning 20 percentage
points since the start of May.
Australia's woes are due to perceptions of a slowingeconomy in
China, which has recently had a voracious appetite for Australian
commodities. It's no coincidence that the South African and
Brazilian economies, which also have a heavy dependence
oncommodity exports to China, are also slumping right now.
The China contagion appears to be spreading to countries that
aren't focused on commodities. The
iShares MSCI Thailand Capped Investablemarket index ETF (
, for example, has dropped from $95 to $79 in just one month,
with some of that weakness attributable to currency effects as
the Thai baht slides. (Investors who suffered through the Asian
currency crisis of 1998 probably don't want to hear about the
baht, which utterly collapsed 15 years ago.)
Is it time to prepare for another global meltdown as we saw in
1998 and again in 2008? No way. In fact, this is the time to
focus on the opportunities that are emerging for these markets.
I've written a number of times thatemerging markets have far more
robust long-term growth prospects than developed markets, and
equally important, these economies are so much more effectively
managed (with much deeper currency reserves) than they were a few
In a recent article, I also noted that they were comparatively
inexpensive right now. In just the past month, the
iShares MSCI Emerging Index ETF (
has underperformed the S&P 500 by 10 percentage points. Over
the past two years, that performance gap widens to a stunning 43
percentage points. In that time, the U.S. dollar has strengthened
roughly 10% against a basket of global currencies, which
partially explains that gap.
But here's the rub when it comes to currency impacts and
globalinvesting . A series of short-termfactors can push the
dollar up (and other currencies down), but that can actually
provide relief to countries on the other end of the currency
Consider Brazil and Australia. Those countries had been suffering
from an overly robust currency in recent years, which made their
(non-commodity) exports uncompetitive and introduced inflationary
pressures from rising import prices. However, that serious
headwind is vanishing quickly.
Since the summer of 2011, the Brazilian real has weakened from
1.60 to the dollar to a recent 2.13. That 33%depreciation is
being largely cheered in Sao Paolo and Rio de Janeiro, even if it
is being mostly ignored here.
These currencies can still fall further in the nearterm , but
long-term trade flows suggest they are already becoming
quiteundervalued . And over time, as China and otherkey currency
factors start to loosen up, these flagging currencies are likely
to rebound. Thatwill inflate your returns if you ownstocks
orfunds that are invested in these economies.
The falling currencies have been a headwind in recentquarters ,
but you should now be looking at them as a potential tailwind.
Risks to Consider:
The real risk here is the Chinese economy, which appears to
be slowing. If this huge economy -- the world's second largest --
really stumbles, then emerging markets, along with their
currencies, will slip yet further.
Action to Take -->
Global investing is surely not for the faint of heart, as these
rapid currency swings are showing. Yet it's crucial that you stay
focused on the still-impressive long-term trajectory for many of
these economies. On a relativebasis , they haven't sported this
much value in several years, which for far-sighted investors
should spell opportunity. Be prepared for more near-term
choppiness, which is the price to pay for exposure to
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