Why a Home-Country Bias Can Kill Your Portfolio
By Evaldo Albuquerque, Editor, Exotic FX Alert
When I was a little kid growing up in Brazil, I used to walk to a local grocery store every day to buy candy. I always bought the same kind.
But one thing was never the same: the price.
Every time I went back I had to pay more. The Brazilian cruzeiro, the official currency at the time, kept dropping in value. Eventually, it got a point where it wasn’t worth the paper it was printed on.
In 1990 Brazilian inflation hit an all-time high of 2,938%. No, that’s not a typo. Inflation was just that brutal.
But in 1994, the Brazilian government implemented some serious fiscal reforms and introduced a new currency, the Brazilian real.
After just three years, inflation had dropped to single digits. Today hyperinflation is nothing more than one of my childhood memories.
Meanwhile, the Brazilian real is now one of the strongest currencies in the world…
The evolution of the Brazilian economy is just one example of the dynamite growth coming out of once so-called “emerging” economies.
Those who see the opportunities in these regions will make a killing in the years to come. (I’ll tell you how to do that in just a second…)
A Valuable Lesson I Learned from the Brazilian Real
Brazilisn’t the only emerging market country that has made some remarkable progress in the past decade.
Many other developing nations, especially inAsia, have also greatly improved their economic policies and the institutions that implement them.
These nations have planted the seeds of sustainable future growth. On the other hand, theUnited States, European Union, and many other developed nations are now harvesting the results of years of massive accumulation of debt.
The future doesn’t look so bright for these “rich” countries. Western economies drowning in debt will continue to lose economic power in the global scenario.
For the past decade emerging markets’ contribution to global growth has already been increasing. The IMF now expects emerging markets to produce more than 60% of the world’s economic growth over the next four years.
The Brazilian real is a living example of how things have changed.
But a lot of investors still don’t get the message.
It’s Time to Get Rid of a Dangerous Bias
The credit crisis has definitely blurred the distinction between “Emerging” and “Developed” nations. Those so-called “emerging” markets have definitely emerged as the strongest economies in the world.
Still, mostU.S.investors feel more comfortable investing in local assets because they continue to view foreign assets as riskier.
They still remember the 1997 Asian crisis, the 1994 Mexican peso collapse, and the 1998 Russian debt default.
The natural tendency to be most attracted to investments in domestic markets is common. It’s called home-country bias – and it’s dangerous to your portfolio. It means you can miss out on the best opportunities.
Take now for instance…
Many investors fail to realize the past crisis actually helped many emerging economies build a more solid foundation for future growth. In fact, most emerging markets recovered from the recent global recession very quickly.
That’s why exposure to emerging markets has never been more important.
If you are to be successful, we need to become comfortable investing in these rapidly expanding emerging markets to hedge against, say, domestic monetary policies that are devaluing the U.S. dollar. (If the dollar falls in value, the cost of maintaining your lifestyle increases.)
There are different ways to capitalize on the strength of emerging market economies. Foreign stocks are always the first asset class that comes to mind.
But there’s another – and potentially more profitable – way to access these markets: and that’s through investing in currencies.
Unlock Serious Profits With
These Currencies
It’s unfortunate that many investors fail to consider currencies as an asset class.
The Brazilian real has shown all of us how investing in emerging market currencies can be a very profitable proposition. In the past eight years the currency has appreciated by more than 100%.
The performance of the real just reflects all the economic improvements the country went through in the past decade.
Currencies simply reflect the economy’s strength. That’s why currencies are an excellent way to participate in the emerging market growth story.
Today many currencies from Asian countries have the same potential the Brazilian real had eight years ago. As those nations continue to take center stage in the global economic scenario, their currencies have no way to go but up.
In the long-term currencies such as theSingaporedollar, Chinese yuan, and Indian rupee will appreciate a lot more against the dollar. You can play them with ETFs, CDs, or even foreign stocks.
But emerging market currencies also offer some serious profits in the short-term. These economies receive a lot of capital flows because of their relatively high growth and interest rates.
But when risk events emerge, investors do not hesitate to take their money out of those countries.
These combating sentiments of greed and fear spawn the perfect market for trading in foreign currencies. Capital inflows and outflows create incredible opportunities to trade exotic currencies in Asia, Europe andSouth America.
Best of all, you can trade these emerging market currencies from right here in theU.S.through any standard Forex account – no overseas account needed.
Bottom line: No matter how you decide to invest in emerging markets, they should be part of your overall strategy. Investing or trading their currencies is a decent place to start.
Best Regards,
Evaldo Albuquerque
Editor, Exotic FX Alert
P.S. As I said, there are several ways you can add emerging market currencies to your portfolio. Right now in Currency Capitalist, we have long-term positions in the Turkish lira, Brazilian real, South African rand and the Mexican peso – to name a few. Even better all these plays pay some serious income. To get the inside track on these plays paying “unclaimed dividends,” click here
