BRIC 2010


Our last update looked at BRIC opportunity versus the US dollar.

That update entitled Bric Value Speculation said:  BRIC investing makes sense because these countries are still viewed as emerging markets… but they now are major economies.

Together, these four countries generate approximately 27% of the world´s Gross Domestic Product (GDP).

The BRIC economies are also growing faster than in the Western world.  The average annual GDP growth of a BRIC nation was greater than 7% before the recession, as compared to approximately 2% for a G-7 nation.

The future growth of the global economy depends largely on the BRIC economies continuing growth.

The message then showed how to weight BRIC positions based on value.

This update looks at how to weight BRIC and other currencies based on US dollar moves.

Last week my account adviser at Jyske Global Asset Management sent me this note. 

Gary, The USD on the move!  The main focus this week has been on the FX market. We have had a long period of a declining US Dollar against most other currencies. The market participants have been waiting for an excuse to take profits. The market got its excuse last week, where we for the first time saw better than expected US unemployment figures. The non-farm payrolls where better than expected and the unemployment rate dropped to 10%. When the numbers hit the market the EUR/USD was trading above 1.5000 and during this week the USD strengthened approximately 5%, currently trading at 1.4350.

The correction of the EUR/USD also indicates that the psychology in the market could have changed. During 2009 improving economic figures led to a risk-on scenario where investors began  to diversify in to  more speculative markets and at the same time exiting the USD safe-haven. The change in psychology has resulted in a focus on possibly increasing interest rates as the economies worldwide begin to improve. The US economy shows signs of improvement and investors are thus beginning to focus on being long USD assets.

The FED however announced no change in the FED funds after their meeting on Wednesday. Bernanke told the market on the following press conference that the interest rate would remain unchanged until the economy is back on track and we see a significant drop in the unemployment rate. We therefore believe that the current strength in USD is temporary and we do expect the EUR/USD to turn around and once again go toward our target of 1.5500.

The main focus in Europe during the week has been on the down grading of the sovereign debt of Greece to BBB+, by both FITCH and S&P. Both rating agencies, still have Greece on a negative watch. The 10 year government bond of Greece now pays a historical 250 bps more than a 10 year German government bond.

Norway once again increased their interest rate with 25 bps, from 1.5% to 1.75%. Norway has seen an increase in the private consumption and a hot real estate market. The Central bank of Norway thus chose to increase the interest rate, even though the industrial production in Norway still suffers.

That note from my adviser cemented my thinking that the greenback’s upswing creates a good time to further reduce US dollar positions. I am reducing my euro positions as well.

The global economy continues to upswing and eventually interest rates will be heading up.

So last week I added more emerging currencies with higher interest rates by liquidating my Jyske Invest Danish Bond Fund and Jyske Invest Euro Bond Fund.

I used the proceeds to purchase higher interest rate bonds away from the euro and mostly into the dollar zone but not the US dollar itself.

I purchased:

NOK 4% Rabo Bank 29.05.2013 (AAA)     101,25   3,60% p.a.
CAD 4,95% KFW October 2014  (AAA)      109,60  2,80% p.a.
EUR 7,25% Bombardier 15.11.2016 (BB+) 102,25  6,70% p.a.
AUD 6,00% EIB 14.08.2013 (AAA)            101,60   5,50% p.a.
NZD 6,50% EIB 10.09.2014 (AAA)            104,50   5,39% p.a
MXN 8% Bonos 19.12.2013 (A+)              103,60   6,97% p.a.
BRL 11,25% EIB 14.02.2013 (AAA)            104,75   9,41% p.a.

I also sold my Hungarian government bonds and bought the Polish bond below with the proceeds.

PLN 6,50% EIB 12.08.2014   (AAA)            107,00   4,77% p.a.

I see any period of US dollar strength as an opportunity to exit the greenback and accumulate other currencies.

The finance.yahoo.com charts show how the dollar has moved in the last decade versus the euro…

US-dollar-chart

The Brazilian real

US-dollar-chart

The Indian rupee

dollar-chart

The Russian ruble

dollar-chart

and the Chinese yuan

dollar-chart

These charts could suggest that the three currencies most due for appreciation against the dollar are the rupee, the ruble and the yuan.

However these three markets are thinly traded which increases their chances of sudden, severe downturns.

The Russian economy is still very oil related and China’s currency still controlled.  India as we saw last message has an overpriced market… so  I have not shifted investments there.

Gary

Learn more about BRICS. Join Merri and me along with Thomas Fischer and my portfolio manager Anders Neilsen at our February 11-14 IBEZ seminar.

Learn more at  Quantum Wealth Florida -International Investing & Internet Business, Mt. Dora, Fl.


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