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.
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.
|< Prev||Next >|
Current Headlines - Finance
Nasdaq to acquire news distributor Marketwired
Nasdaq Inc said on Friday it would acquire newswire operator and press release distributer Marketwired LP for an undisclosed sum, adding to the exchange operator's corporate services offerings. The deal, which is subject to regulatory approval, would be funded through a mix of debt and cash and is expected to close in the first quarter of 2016, Nasdaq said. Marketwired is currently owned by the private equity arm of the Ontario Municipal Employees Retirement System (OMERS), which in October was said to have been mulling a sale of the Toronto-based company.
What's behind the global stock market selloff?
By David Randall and David Gaffen NEW YORK (Reuters) - Global stock markets are on their shakiest footing in years. Investors are fleeing stocks and running to safe-havens like bonds and gold, driven by concerns about economic growth and the effectiveness of central banks' policies. At the same time, tumbling energy prices are upending the economies of oil-producing countries, further slicing into global economic growth.
Energy, banks lead Wall St rebound after grueling week
Wall Street staged a modest comeback on Friday, led by a rebound in financial and energy stocks, after a punishing, widespread rout this week on concerns about the health of the global economy, and ahead of the long weekend. Banks stocks, which were the worst hit due to concerns about the impact of negative interest rates and a energy-backed loan defaults, were the top gainers, led by JPMorgan's 5.1 percent gain. It's the fear factor of oil continuing to move lower and its impact on oil debt around the world," said Peter Cardillo, chief market economist at First Standard Financial in New York.
Rupee strengthens, but still above 68-mark
Mumbai, Feb 12 (IANS) The Indian rupee halted its downward movement and marginally strengthened on Friday but closed above the 68-mark against the US dollar in the day's trade -- at a level last seen in early September, 2013. During the intra-day trade, the Indian rupee touched its lowest level since early September 2013 at 68.47 on spot. "On the back of risk aversion across Asian stock market, dollar gained against the Indian rupee," Anindya Banerjee, associate vice president for currency derivatives with Kotak Securities, told IANS.
Diplomats aim for temporary Syria truce in a week
MUNICH (AP) — Diplomats agreed Friday to work toward a temporary "cessation of hostilities" in Syria's civil war within a week, although efforts to secure a lasting cease-fire fell short.
Gold eyes best week in four years as stock market turmoil lifts haven appeal
By A. Ananthalakshmi SINGAPORE (Reuters) - Gold on Friday clung to sharp overnight gains that pushed the metal to a one-year high, and looked set to post its best week in over four years as stock market turmoil stoked safe-haven demand. MSCI's global stock index closed more than 20 percent below its all-time high. U.S. 10-year Treasury yields hit their lowest since 2012 and the Japanese yen climbed to its highest in 15 months against the dollar, while money continued to flow into gold-backed exchange traded funds.
Bernie Sanders promises to free half a million prisoners in first term
$15 minimum wage protesters crash Democratic debate in Wisconsin
Clinton, Sanders spar over super-PACs and megadonors
George W. Bush to hold first campaign rally for Jeb