The Weakening Dollar – II

Now we’ve seen some reasons for the Dollar’s continued weakening, how do we profit from this knowledge? Here’s a compendium of worthwhile investments that I’ve been researching.

  • Invest in foreign currencies and foreign bonds

If your bank allows you to make foreign currency deposits, that may be the simplest solution. You should avoid the sterling, as Britain is already facing many of the same problems as the United States (a hyper-inflated real-estate market, and an over-abundance of financial services). European euros and Japanese yen are probably the best bets in individual currencies, although there’s also a case for Canadian dollars, which have eclipsed parity with U.S. currency thanks to Canada’s powerful natural resources sector.

One possible international-bond mutual fund is the no-load T. Rowe Price International Bond Fund (Nasdaq:RPIBX), which invests in high-quality, non-dollar-denominated bonds.Let us issue two warnings. First, don’t buy bond funds investing in foreign junk bonds (because you’ve then put yourself in the same position as the asleep-at-the-switch German banks that invested in subprime mortgages – you don’t know what you’re getting). Second, don’t buy an emerging-markets bond fund, because emerging-markets bond portfolios, unlike stock portfolios, tend to be dominated by the countries with the most debt, which are consequently are the countries most in danger of defaulting.

  • Invest in large-cap stocks with foreign exposure

The stocks will benefit from the weak dollar in three ways:

  • First, if they do business as local companies overseas, their assets and income in foreign countries will be worth more in dollars.
  • Second, if they export from the U.S., their income will go up relative to their costs – a wonderful position to be in.
  • And third, the falling dollar actually makes the price of their exported products go down in foreign-currency terms, which makes these U.S. wares more competitive in foreign markets and against rivaling products. That could boost sales outright.

There are lots of these companies. Three terrific choices would be The Coca Cola Co. (NYSE:KO), which does business all over the world, The Boeing Co. (NYSE:BA), which is the United States’ largest exporter, and restaurant-operator Yum! Brands Inc. (NYSE: YUM), which boasts such great brands as KFC, Pizza Hut and Taco Bell. Both Coke and Yum! are going great guns globally, and both boast excellent brand recognition in such key markets as China. Boeing will benefit from a huge upswing in air travel as global markets develop: It recently forecasted a need for $340 billion worth of commercial aircraft in China alone over the next 20 years. All three stocks are currently trading at Price/Earnings (P/E) ratios greater than 20, but the earnings should be strong.

  • Look at Eastern Europe

In Europe, the rising euro is likely to make Western Europe increasingly uncompetitive, by boosting its costs. In addition, several Western European countries – most notably, Britain, Spain and Ireland – have recently had housing bubbles even larger than the United States in relative terms, and as a result may suffer accordingly. A much better bet is the emerging growth area of Eastern Europe and Turkey, the latter benefiting from the improved political links and growing trade with the EU. Since Eastern Europe has much lower labor costs than the EU, as well as solid educational systems, the synergies are obvious. There are very few American Depository Receipts (ADRs) from the region, so the best bet for emerging Europe investors is the Spider Standard & Poor’s Emerging Europe ETF (AMEX:GUR), which invests in the share indexes of the Czech Republic, Hungary, Poland, Russia and Turkey. However, this ETF was founded only in March 2007, and currently has a market capitalization of only $29 million.

  • Invest in Brazil

At first glance, Latin America offers only modest potential to benefit from a declining dollar, because that region’s economies are so closely tied in with the United States and its currencies generally follow the dollar – albeit with a few crises all of its own. However, since non-U.S. growth is a powerful driver of global-natural-resource prices, it is desirable to take advantage of Latin America’s huge base of natural resources [although the populist tendencies of the local politicians can make this risky]. Currently, the most-economically-sound countries in that region are Brazil and Colombia, both of which have recently shown signs of better government and genuine economic growth. Therefore, it well worth considering either, or both, of two Brazilian ventures: Either mining company Companhia Vale do Rio Doce, sometimes referred to as CVRD (NYSE:RIO), or the oil company Petroleo Brasilero S.A (NYSE:PBR), more commonly referred to as Petrobras. Both companies are trading at reasonable earnings multiples (15 for CVRD and 13 for Petrobras), and each stands to benefit both from local economic and population growth, as well as from the insatiable-and-growing world demand for commodities and energy.

  • Invest in India

Asia is most certainly the world’s most dominant growth region – not only for the last five years, but also for the next 25. Unfortunately, both of the two fastest-growing Asian markets, China and India, are richly valued at present. Both countries are also dependent on exports to the United States, so would suffer margin erosion in the event of a very weak dollar. Indeed, China equities are somewhat pricey at the moment, but India is somewhat cheaper, with a P/E ratio of around 20, very reasonable given the Indian economy’s persistent 8% growth rate.Picking individual stocks is difficult, and there are not many with ADRs that U.S. individual investors can trade. Fortunately, there is an ETF that invests in the Indian portion of the Morgan Stanley Capital International share index – the iPath MSCI India Index fund (NYSE:INP), which is satisfactorily large at $366 million.

  • Invest In Japan

In Asia, take a look at the four most developed economies: Japan, South Korea, Taiwan and Singapore. All of these countries have living standards close to that the of the United States, while Korea, Taiwan and Singapore still boast exciting rates of economic and productivity growth. However, if your intention is to hedge your holdings against a declining dollar, Taiwan and Singapore may not be the best bets, because they are both relatively small domestic markets with high export dependence on the U.S. economy.Japan, on the other hand, is the world’s second-largest economy, and has only recently gotten back on the growth track after a decade of recession caused by its late-1980s speculative bubble. A weak-dollar strategy should focus on the smaller Japanese companies, since they would benefit from domestic Japanese growth, meaning their profits are not tied to exports. Hence my recommendation would be the streetTracks SmallCap Japan ETF (AMEX:JSC), an index fund devoted to smaller Japanese companies.

  • Invest in Korea

South Korea is a rapidly growing economy whose stocks are currently selling at a very attractive multiple of around 12 times earnings. And there are a number of waves to catch in that market, as the country is a major global player – if not an outright leader – in such areas as telecommunications and heavy manufacturing.There’s one other point that’s worth noting – and it’s a significant one. In late October, U.S. investing guru Warren Buffett, chairman of Berkshire Hathaway (NYSE: BRK.A, BRK.B), paid his first visit to South Korea, where the billionaire has invested in 20 of that countries companies, including a 4% stake in the country’s leading steelmaker, (NYSE: PKX). Buffett definitely sees Korea as a worthwhile market.

Two ways to invest in Korea is either through the Korea Fund (KF) or the iShares MSCI South Korea Index Fund ETF (EWY).

  • Buy Gold

After Gold’s recent surge to over $800/oz, you might think its run is over. But with the global liquidity crisis and all major currencies inflating the currencies, gold has become a safe haven for risk-averse investors. During the last gold-bull market in the early 80’s, gold peaked at $850/oz. Adjusted for inflation, that works out to $2,200/oz today. Gold still has a long way to run.

  • Buy Canadian Resource Companies

While the oil produced in Canada isn’t as cheap as that produced in Saudia Arabia ($30 vs $2), with oil hitting nearly $100/barrel, its still very profitable.

These are some of the multiple ways you can hedge your portfolio against the falling dollar. Remember, the worst thing to do is to ignore it and do nothing!

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