When it comes to evaluating stocks for our portfolio, we all know that we need to consider the company’s growth opportunities, price to earning ratios and dividend payout. However when it comes to evaluating international stocks, we need to consider a lot more. When we invest in international stocks, we are investing in not only the opportunities of the foreign company, but also in the growth opportunities of the country as well. We have long been taught to buy stocks at value levels and avoid buying stocks that have already had large rallies since they run the possibility of becoming overbought. Yet by the same token, it is also smart to buy countries at a value and to avoid ones whose currencies may have already appreciation significantly. Investing in international stocks involves exposure to the country as well as its currency. If we buy a stock of a country whose currency is trading at a multiyear high, a correction in the currency, which is not an uncommon phenomenon, could turn our investment into losses even if the stock remains unchanged. In contrast, if we invest in a company whose local currency is trading at multiyear lows, a bounce could bring about unexpected gains.
So with that in mind, let us take a look at two countries that are both expected to see continued growth this year to understand how currencies can make one market more attractive than the other.
The first is Canada. With booming commodity prices and increasing domestic demand, the Canadian economy has been performing extremely well. Although the stock market has recently pulled back, long term demand for resources from countries like China and India should continue to fuel healthy growth in the Canadian economy as well as help the equity market rebound. Many Canadian stocks are at value points, but even so buying right now may not be the best idea. Why? Because the Canadian dollar is trading at a 28 year high against the US dollar or in other words, the USD/CAD currency pair is trading at a 28 Year low. After such a deep slide in a relatively short period of time, the currency pair has more room to rise than slide. Any rebounds in USD/CAD would work to diminish returns made in the stock market.
Meanwhile Japanese growth is also rebounding as the country pulls itself out of 10 years of stagnation. Growth in the Asian region in general has boosted the prospects for the Japanese economy. Most recently, first quarter GDP was revised higher as the country is on track to mark its longest post war recovery. Stocks have retraced quite a bit in recent weeks and are also reaching good value points. However unlike the Canadian dollar, the Japanese Yen is trading right in the middle of its seven year range which means that it has just as much room to rise or fall. Yet, prospects for more growth and further Chinese revaluation leans the probabilities towards more gains than losses for the Japanese Yen. This means that anyone long Japanese stocks would earn not only possible gains from the stock market returns but also a good likelihood of gains in the value of their Japanese Yen when they are converted back to US dollars.
Therefore if you want to hold onto your stock market gains or find a way to increase profits, it is extremely important to make sure that you check the value of the country’s currency compared to its historical value and to also do your homework on what may be the most likely directional movement for the currency.
Thai Baht
Chinese Yuan
Iranian Rial
UK Pound
Danish Krone
Argentine Peso
UAE Emirati Dirham
South Korean Won
Venezuelan Bolivar
Swedish Krona
Taiwan Dollar
Indonesia Rupiah