Is Now a Good Time to Invest in Currencies?

If you are looking to invest your money somewhere, currencies like the Euro or the U.S. dollar may not be the best option for you right now. Although currencies have always been a significant component of pension funds in countries like the U.K. and the U.S., since the market crash of 2008 currencies have had a less than stellar performance as an investment instrument. Up until the crash, a successful investment strategy was to borrow in a currency that had a low yield and use that money to invest in a currency that had a high yield. That story changed after 2008. In terms of performance, last year was perhaps as bleak as it would get for top currency indices.  Considering the debacle in which the European Union is right now, it might not come as a surprise that the Euro has been getting weaker and weaker every month for the past twelve months. Here is a chart highlighting the Euro’s performance against the Canadian dollar for the past five years:

 

 

For those Europeans who saw this coming, even as late as six months ago, a good investment strategy would have been to get into a currency future. A currency future is a futures contract to exchange one currency for another at a specified date in the future at a price (exchange rate) that is fixed on the purchase date. 

Economics 101 tells us that the above graphical trend makes European imports cheaper for Canadians and Canadian exports more expensive for Europeans. Luckily for Canada, exports make up only 29 percent of the country’s GDP. That somewhat explains why Canada’s GDP continues to grow despite the adverse global conditions. Moreover, the USD-CAD exchange rate has been hovering at around parity for almost a year now (see below). Despite Canadian exports becoming more expensive for Americans, the United States continues to be Canada’s biggest trading partner. With the Canadian dollar being as strong as it is, it would be to Canada’s advantage to form ties and trading agreements with emerging markets as opportunities for trade are aplenty across the Pacific and Atlantic oceans. 

 

Individuals looking to invest in currencies can also use the same proposed strategy on a micro level.  Analysts say pension funds are nowadays “investing in emerging market currencies, though this is currently more popular among UK funds than those in the US”.

The Bottom Line:

If you are thinking of investing in currency these days, it is much better to expand your horizons and invest in emerging market currencies rather than one of the top currency indices. In the long term this is a much better investment strategy, as returns on these sorts of currency investments are expected to be considerably high according to experts and trends. 

Ali Kazerani

Could India’s biggest threat to growth be…Itself?

Raghuram Rajan could be the ‘go-to-guy’ to get India out of it’s slower than expected growth-woes

Hey folks! Let’s take a dive into some metrics that have come out of India recently; figures which have many investors scratching their head wondering, ‘what happened to the rapid-growth (and returns) seen only a few years back?’

Let’s get down to the point and expose the elephant in the room: GDP growth. The once jewel of the British Empire’s economy expanded at a rate of only 5.5% in the April-June period. Granted this was higher than the 5.3% GDP growth of the previous three months BUT it cannot even come close to the 9% expansion of early 2011!

"Whilst an upside surprise at 5.5%, the pace of growth is undeniably below potential and validates the need for the government to address sluggishness in investment and external sector activity," said Radhika Rao an economist at Forecast Pte.

So let’s break down what’s holding our mighty elephant back:

        Slowing global demand and uncertainty: What a surprise! (well, not really)… with key economies in trouble (such as Europe and even China) the global macro climate is hurting India in a big way.

•      India's factory output fell 1.8% in June from a year earlier, the third fall in four months

•      Foreign direct investment in India fell by 78% in June, from a year earlier

          A growing trade deficit:

•     Recent figures show that imports outgrew exports by 15.5 Billion dollars

•       India's trade deficit with China jumped 42% to $40 billion in the last financial year

             An indecisive government in a political deadlock and numerous allegations of corruption has harmed India’s outlook toward foreign investors.

•          There is becoming a growing concern amongst economists and opposition parties that India’s government  will only pursue reforms which are favorable to its political partners

•       Analysts are recommending that the government needs to take action to improve the investment climate in order to maintain a high growth rate in the future

            The S&P's has stated it would be more comfortable if the government raised retail petroleum prices and reduced energy subsidies as it has promised, and introduced a goods and services tax (GST)

Let’s talk about the Trade Deficit for a moment…

A 15.5 Billion dollar deficit is no laughing matter, especially given the perceived notion of India being an exporting power house. What’s happening… is this a cause for concern? Or should we be tingling from the excitement of new growth possibilities? Well, if India plays its cards right, the latter may be the correct course of action.

India has significant investment needs; it has issues in its infrastructure – or lack thereof – and needs to import capital goods as a part of where it is in its growth cycle. The result is (no matter how you spin it), India simply needs to import at this phase in the game.

And with a specific note on China; as China advances its production to a more value-added model, India will become more of a manufacturing center than what it is today – so it might sound like a good idea now to recapitalize and invest in infrastructure for the future.

So who will guide India through these uncertain times?

Enter: ‘reformed minded’ and newly appointed Chief Economic Adviser to the Indian Government: Raghuram Rajan (he called the 2008 Financial Crisis in 2005!!)

Could he be the man to save the day in India? As a strong believer in liberalization and privatization, he says “We need to become paranoid again [about growth], as we were in the early 1990s,” And while it might take some work, here’s what he suggests in terms of policy reform as quoted from a recent speech:

1)   Raise fuel prices to international levels in a set of quick steps, and then completely deregulate them. Announce this as soon as politically possible, and do not roll back.

2)   Be kinder to foreign investors – they are not the enemy but a necessity -- we need their money to fund our spending to the tune of 4% of GDP. No doubt, however badly we treat them today, they may eventually want to be in India, but crisis are always about timing. We need them now, when India looks increasingly tattered compared to alternative investment opportunities, not five years from now when growth recovers.

3)   We should bring certainty about taxation to foreign investors, and resist the temptation to levy new retrospective claims.

What in effect Mr. Rajan is trying to do hand India over to the free market again. Reduce government subsidies and appease foreign investors by making India a reliable market to do business in. Can it work? I think so, but there needs to be strong support from the government and a crackdown on corruption for it to happen.

The bottom line:

While recent scares in growth and trade metrics might make you skeptical of India’s future – hold on a moment and think: the trade deficit is there because India needs to invest in capital for production and infrastructure, all which will pay off in the future. Moreover, now with a more free-market inclined chief economic advisor, India will (hopefully) take the correct policy actions to promote a healthy market and ensure foreign investors are kept happy and wanting to come back to India for their business needs.

Matthew MacMull

Weekly Review - Sept 8.12

India

McDonald has announced it will launch a Vegetarian Outlet in India sometime June 2013.  This will be the first vegetarian restaurant in the world!  A few other fast food restaurants are fleeing into India in attempt to capture a consumer base of 1.2Billion people.  Can you say "McDonaldization" I mean globalization. 

India released its trade balance on Monday.  Economist forecasted a deficit of -8.8Billion however their estimates were wrong.  Actual number was -15.5Billion!  I think they(economist) need to update their model.  This means Imports outgrew exports by 15.5Billion dollars.  This re-affirms our belief that India is in the process of industrialization and has a lot of growth potential. 

Europe
The dreaded Troika stepped back into Greece this week to impose more restriction.  Austerity is a dirty nine letter word for many Greeks.  The public force (police and military) successfully opposed cuts to their pay checks.  This means the ministry of Finance will look into other areas to cut…. PENSIONS are next! With unemployment almost at Spanish levels of 25% a cut to pensions will be devastating.  Old age pensioners are the bread winners for large number of unemployed.  Hundreds of retirees took to the street their signs and protested this week.





On a Euro wide level,  Purchasing Manufacturing Index (PMI) was less than 50 indicating again another contraction in the economy.  Managers are still bearish.  Here are more gloomy numbers to show that Europe is in a big mess. 
*Retail Sales (MoM) : Down -0.2%
*GDP(QoQ) : -0.2%

USA
Much attention to Congressional speeches this week adverted attention away from the real problem.  Unemployment is still above 8% and wont seem to go down no matter how much stimulus and tax breaks are given.  Plain and Simple, business aren’t hiring new workers.   Unemployment rate came out this week, it still remains above 8% at 8.1%(not seasonally adjusted).   Also, manufacturing index came out showing that levels are below 50 which shows a bearish outlook in business. 

Canada
As expected, interest rate remained unchanged on Wednesday.  Bank of Canada kept rates at 1%.  Furthermore, Purchasing Manufacturing Index is well above 50 at 62.5.
Canadians are doing well!  Carney stated "As long as demand for commodities are strong Canada will do well"  In other words "Expensive oil = happy Canada."

Investing amid Crisis

As the crisis lingers on, unemployment, at 11.1% in Europe, U.S. investors  moving assets from the euro zone by selling $4.1 billion more securities than they bought since 2011 - causing a flight from euros to US bonds, while Draghi reinsures that anything will be done to save the union, should you consider Europe as an investment in your portfolio?

Well let’s revisit basic Economics…

Flight to safety has caused yields to drop in some cases to negative levels- low interest rates -> lack of lending/investment -> depreciated currency -> increase in trade surplus -> increase in exports → investment in exporting companies.

Exporting companies in Europe should not be ignored, as they are less dependent on European consumers who are at the moment pulling back on any forms of consumption.  A country that takes the spotlight is Germany and its competitive technology driven export economy. As the stocks are trading at deep discounts, now is the time to look at established exporting companies.

Germany is contributing 8.7 billion euros this year to the European rescue fund, quite a hefty amount for a nation whose anti-bailout voters are criticizing Merkel’s decisions.  However, what’s even heftier is the amount of exports Germany has gained amid the crisis  - 100 billion euros!

Trade surplus has increased by 4% of GDP due to the lower currency.  This increased competitiveness is also due to the fact that Germany’s exports are shipped outside the European union unlike countries like France and Spain.

If youre not familiar with specific stocks in the German market, the easiest way to achieve exposure is through an ETF.  We recommend iShares MSCI Germany Small Cap Index Fund.  Although the ETF is comprised of small cap stock, its sector weighting is 30 % in industrials and 14% in technology stock – both competitive in Germanys export market. 

Anna Nepravishta