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
All charges dropped in Freddie Gray case
Facebook trounces Wall St estimates with sharp ad sales growth
Facebook Inc provided more evidence on Wednesday that it can turn eyeballs into profit as the maker of the world's most popular app and social website trounced Wall Street's estimates, sending its shares to an all-time high. The leading social media company's mobile app and push into video attracted new advertisers and encouraged existing ones to spend more. "Facebook has shown that you can be a giant and you can be innovative," said analyst Patrick Moorhead of Moor Insights & Strategy.
Facebook trounces Wall Street estimates with sharp ad sales growth
The leading social media company's mobile app and push into video attracted new advertisers and encouraged existing ones to spend more. "Facebook has shown that you can be a giant and you can be innovative," said analyst Patrick Moorhead of Moor Insights & Strategy. Facebook is adapting better to the shift toward mobile and video than social media rival Twitter Inc , which reported its slowest quarterly revenue growth in three years on Wednesday.
Disappointing earnings revive speculation on Twitter's future
By Yasmeen Abutaleb SAN FRANCISCO (Reuters) - Twitter Inc disappointed investors yet again on Tuesday with second-quarter earnings that missed estimates and a lower-than-expected outlook, reviving chatter about a possible sale of the company and the future of Chief Executive Officer Jack Dorsey. With the stock falling almost 15 percent Wednesday, Twitter shares are down 50 percent since Dorsey returned last summer to the helm of the social media company he co-founded. At a market cap of about $11 billon, compared with more than $40 billion at its peak, Twitter could now be a more attractive takeover target.
All charges dropped in Freddie Gray case
Wall St. ends lower after Fed keeps rates unchanged
Wall Street ended lower on Wednesday after the Federal Reserve left interest rates unchanged but opened the door to a possible rate increase later this year. The Fed had not been expected to move interest rates at its two-day meeting, ended on Wednesday, but investors have been anxious for hints about when an increase might come in light of concerns about fallout from Britain's vote in June to leave the European Union. "A rate increase is warranted this year, most likely at the end of the year, but a lot has to do with a benign world arena." After investors shrugged off Britain's unexpected vote in late June to leave the European Union, the S&P 500 rallied and is up 6 percent year to date.
UniCredit to ask authorities to investigate possible market abuse
UniCredit will ask authorities to investigate possible market abuse in relation to media reports over its upcoming strategic review, which on Wednesday affected its share price and that of two of its units, the Italian bank said in a statement. UniCredit said that, if necessary, it would "pursue other available means to ensure that its rights and reputation are protected." The bank said its shares and those of its units FinecoBank and Bank Pekao had experienced "unusual ... price movements." Shares in both UniCredit and its online broker Fineco fell 4 percent on Wednesday as the Milan stock market gained 1 percent . Bank Pekao lost 3 percent.
Warren declines to say if Kaine was the right VP pick
Fence-jumpers arrested outside the DNC
French priest killer described as a 'time bomb'