You may remember today's guest blogger, Nicholas Vardy, from his last post, "Two Contrarian Trades for the Coming Decade," which garnered quite the response from Trader's Blog readers. Today, he's returned to share his insight and ideas on improving your global investment returns. Whether you agree or disagree, leave your comments or questions below. You may also be interested in picking up a copy of his Top 10 Picks Report here.
If you are new to foreign investing, the importance of currency movements can be a hard thing to get your head around. Yet, understanding how your position as a U.S. dollar investor impacts your foreign investment returns is the secret to maximizing profits worldwide. And below, I’ll tell you exactly how that secret works.
Superior Economic Prospects Have “Arrived” in Brazil
If you see a country that boasts strong economic growth, high savings and low debt, and is able to sell goods, services, or natural resources that the rest of the world wants to buy, you'd expect this to be reflected in the performance of a country's stock market.
A good illustration of this is Brazil -- a country whose economy and prospects have improved remarkably since President Luiz Inácio Lula da Silva came to power in 2003. Brazil's Rio de Janeiro was recently picked to host the 2016 Olympics, beating out Chicago, Madrid, and Tokyo. Brazil's sovereign debt, so close to default earlier in the decade, has been rated investment grade by Standard & Poor's, Fitch, and Moody's. JPMorgan Chase recently increased its forecast for Brazilian economic growth next year to 6.2% from 5% on rising domestic demand. As Brazilian President Lula da Silva recently proclaimed to the International Olympic Committee, "Our time has arrived. It's arrived!"
Certainly, 2009 was a very good year for the Brazilian stock market. For example, if a Brazilian investor picked up shares of a local Brazilian real-denominated index fund on the last day of 2008, then sold the shares one year later, his profit would have been 82.6%.
That's certainly much better than if you invested your U.S. dollars into the S&P 500, during that same time span. If you had, you would have earned just 23.5%. Not bad, but certainly not 82.6% either.
Boost Your Returns with a Soaring Currency
But what would your returns have been if instead of investing in the S&P 500, you had invested in Brazil in 2009 through an exchange traded fund (ETF) like the iShares MSCI Brazil Index (EWZ)?
Well, thanks to the Brazilian real's nearly 40% appreciation against the U.S. dollar in 2009, you would have made much more than the 82.6% profit pocketed by the local Brazilian investor mentioned above.
The "extra" return you see on the chart above -- the difference between the performance of the Brazilian stock market index (Bovespa index) and the iShares MSCI Brazil Index (EWZ) -- holding constant the differences in the way the indexes are calculated -- is due to the appreciation of the Brazilian real versus the U.S. dollar. In this case, your currency-boosted return would have been 106%. ( confirm)
In the case of Brazil in 2009, as the U.S. dollar weakened -- and the Brazilian real strengthened -- more U.S. dollars were put back into your pocket as an investor in Brazilian stocks.
The Key to Turbocharged Returns
As the example of Brazil in 2009 shows, the impact of foreign currencies on your U.S. dollar investments can make the difference between double- or triple-digit gains.
Understand that once you've invested in a foreign stock or ETF, you've essentially taken your money out of U.S. dollars and put it into a foreign currency.
For investors in Brazil, currency appreciation was a big positive in 2009. For unlucky investors in Hugo Chavez's Venezuela, which just announced a devaluation of its currency, the bolivar, this was negative.
And that's why investing in a country with an appreciating currency is the secret to turbo charging your profits around the world.
Click here to claim Top 10 Picks Report for 2010
London-based Nicholas Vardy holds degrees from Stanford and Harvard. He writes a weekly e-newsletter called “The Global Guru,” focusing on international investment expertise. He is also editor of the wealth-building newsletter Global Stock Investor , as well as a weekly trading service, Global Bull Market Alert.