An Easy Way to Buy Emerging Market Currencies
I am often asked: What do you think of emerging market (EM) currencies? My usual answer is that many, especially those among the Asian currency block, are fundamentally undervalued against the U.S. dollar and represent an excellent long-term investment.
Many people however find it difficult to buy these EM or exotic market currencies. But there is an easy way for you to do it. And as you view the following charts, I think you'll quickly see what I mean.
Below are charts of five countries' stock markets (black line on the chart) compared with the value of their currencies (orange line on the chart) valued relative to the U.S. dollar. The correlation is very tight i.e. higher stocks and higher currency values, vice versa.
Singapore
Thailand
Indonesia
Brazil
South Africa
So, I think it can be said that if you are bullish on emerging market stocks, you must also be bullish on their currencies. And if you're bearish on the stocks, you're bearish on their currencies relative to the U.S. dollar.
Why is this correlation between EM stocks and their currencies so tight, when we don't see the same degree of correlation among the currencies of the industrialized world currencies relative to their stock markets?
It Is All About Liquidity!
The amount of currency issued and outstanding in emerging markets is relatively small compared to industrialized countries — makes sense. Plus, the demand for EM stocks results in a direct and corresponding relative demand for the currencies. That's because to buy those stocks in local markets you first have to convert whatever currency you are using to the local currencies in order to make that purchase.
Therefore, a stock decision becomes a currency decision. And the relatively small amount of currency outstanding relative to equity markets in EM countries, directly impacts the value of the currency.
Now as you look again at these charts above, consider this:
By investing in EM stock indices, which can easily be done with the whole host of ETFs, you are effectively making a currency decision.
Thus if you get excited about an EM currency story and don't want to go into the spot Forex market or the corresponding currency ETF isn't available, you can play your new favorite EM currency by owning the local stock index.
And for the average investor, it is much easier to find an appropriate EM or exotic market ETF than it is to find an equivalent direct currency play.
As EM liquidity increases in the years to come, this extremely tight correlation between local stocks and the local currency will begin to breakdown. But for now, EM stock index investing is a simple and powerful way to invest in an EM currency of your choice.
Source: moneyandmarkets.com
| < Prev | Next > |
|---|
Current Headlines - Finance
-
100K protesters flood Brazilian streets in protest
SAO PAULO (AP) — In some of the biggest protests since the end of Brazil's 1964-85 dictatorship, demonstrations have spread across this continent-sized country and united people from all walks of life behind frustrations over poor transportation, health services, education and security despite a heavy tax burden.
-
Asian shares ease as Fed meeting keeps markets on edge
By Chikako Mogi TOKYO (Reuters) - Asian shares eased on Tuesday as investors waited for Federal Reserve Chairman Ben Bernanke to clarify the U.S. central bank's plans for its stimulus programme - with the mere suggestion of fine-tuning it enough to unnerve market sentiment. European stocks are seen easing, with financial spreadbetters predicting London's FTSE 100, Paris's CAC-40 and Frankfurt's DAX will open down as much as 0.3 percent. U.S. stock futures traded almost flat, hinting at a subdued Wall Street start after a rise overnight. ...
-
Afghan president's forces taking security lead
KABUL, Afghanistan (AP) — Afghan President Hamid Karzai says his country's armed forces are taking over the lead for security around the country from the U.S.-led NATO coalition.
-
Ex-hitman: I was heartbroken Bulger was informant
BOSTON (AP) — An ex-gangster who admitted killing 20 people was unemotional Monday when describing his line of work at the trial of his former partner, James "Whitey" Bulger, but called himself heartbroken when he learned that Bulger had become an FBI informant.
-
Airborne laser reveals city under Cambodian earth
SYDNEY (AP) — Airborne laser technology has uncovered a network of roadways and canals, illustrating a bustling ancient city linking Cambodia's famed Angkor Wat temples complex.
-
Seeking a Syria consensus despite US-Russia divide
ENNISKILLEN, Northern Ireland (AP) — Hunting for a glimmer of common ground, the leaders of major economic powers are declaring themselves dedicated to a political solution to Syria's bloody civil war, even as President Barack Obama and Russian President Vladimir Putin stake out diametrically opposite stands on which side deserves military support.
-
Investors guess Fed's actions, push stocks higher
NEW YORK (AP) — Investors on Wall Street are playing a guessing game with the Federal Reserve.
-
PRECIOUS-Gold slips as U.S. equities rise, FOMC in focus
* US equities market rises on Fed stimulus hopes * US gold volume thin, set to hit lowest since April * Volume low in CME's new 1,000-oz silver futures contract * Coming up: U.S. CPI, housing starts Tuesday (Adds hyperlink, market details, updates prices) By Frank Tang and Veronica Brown NEW YORK/LONDON, June 17 (Reuters) - Gold fell around 0.5 percent in quiet trade on Monday as a Wall Street rally reduced the need for safe-haven buying and investors awaited this week's U.S. Federal Reserve meeting for signals on the central bank's monetary stimulus plan. Better-than-expected U.S. ...
-
World shares rally as Fed meeting nears, dollar firms
By Herbert Lash NEW YORK (Reuters) - Global equity markets rose and the dollar strengthened against the yen on Monday on expectations the Federal Reserve will reinforce its commitment this week to supporting the U.S. economic recovery. Stocks on Wall Street and major European indices gained about 1 percent as investors anticipate the end of a two-day meeting of the U.S. central bank on Wednesday, when investors hope to get a better idea on Fed policy from Chairman Ben Bernanke. ...
-
Exclusive: ICE to win EU approval for $8.2 billion NYSE bid - sources
By Foo Yun Chee BRUSSELS (Reuters) - IntercontinentalExchange (ICE) is set to win unconditional EU approval for its $8.2 billion bid for NYSE Euronext, sources said on Monday, in a deal that would strengthen its presence in the lucrative derivatives trading business. The acquisition would give ICE control of London-based Liffe, Europe's second-largest derivatives market, and help it compete with U.S. rival CME Group. New EU derivatives rules, to be gradually phased in this year, will dramatically expand the demand for clearing over-the-counter contracts. ...
 |
- These Five Sectors May Lead the Next Leg of the Rally
- This One Thing Matters More Than Ever in an Investing World Gone Wild
- Will stocks go up or down from here?
- How Much Longer Will This Bull Market Run?
- Don't miss the next secular bull market
- Railroads to new oil boom
- Another way to invest in emerging markets
- An Unexpected Beneficiary of a Recovering Housing Market
- Global Currency War: Unique Opportunities in The Pacific Theater
- Israel develops the next generation operating room