Yahoo Finanzen Good Investors Use Currency Fluctuations as Opportunities
Traveling to foreign countries is always an interesting experience. Aside from dealing with the long airport lines and full-cavity body searches, many people find the journey of going to a faraway land as incredibly exciting.
When you go to these faraway places, one of the routines you become accustomed to is exchanging U.S dollars for the local currency. Many people get surprised by the different amounts of local money they have once their dollars are turned in. When the dollar is strong, U.S citizens benefit by having more foreign capital to use, and vice versa when the dollar is weak. Conversely, foreign travelers love to come to the U.S. when their currencies are strong relative to the U.S. dollar.
Over the last few years, when the dollar was very weak, many foreigners came here not just to splurge on vacations, but to buy prime real estate locations in large urban cities where good situations are difficult to find. The same phenomenon has been taking place in Canada, specifically Toronto and Vancouver, as the Canadian dollar fell versus many major international currencies, especially the Chinese yuan and renmimbi.
Clearly, fluctuating global currencies are a constant in volatile international capital markets. Consequently, there can be plenty of ways to capitalize on the wide swings of currencies.
In the latter part of 2015, commodity prices swung to a generational low and the currencies of any country that is dependent on these commodities saw their currencies also hit generational lows. The most foremost example of this was Brazil. At the time, its South American neighbor, Argentina, saw a change in their political leadership that changed the economic approach toward a more market-friendly administration.
[See: 7 Ways to Profit From the Rising Dollar.]
Brazil's currency, the real, dropped to a low of 4.0938 to a dollar on Jan. 15, 2016, right about the time our stock markets were at the bottom of their correction at the start of the year. The currency has since rebounded to trade at 3.1563 to the dollar, about a 20 percent gain.
Great, you say, so how could you have benefited?
If you want exposure but don't believe in individual stock picking, you could have bought the Brazilian index through an exchange-traded fund at Vanguard, Blackrock, or Fidelity. Your return to date would be 47.3 percent, not accounting for currency translation (of course, right?).
You also could buy the index and hedge the currency risk of the real as well. Just owning the index leaves you exposed to the downside of a real swoon again, but you also benefit from appreciation, which you can see from the return.
If you believe in picking individual stocks, the obvious candidate would have been oil giant Petrobras (ticker: PBR). The trade would have been a big winner, like the ETF, as it currently trades at $12, up from just $3.30 at the start of the year.
[Read: How to Invest in India.]
Naturally, this seems almost too good to be true with these kinds of gains, right? Well, it should be understood a big help was a similar political event as what happened in Argentina also took place in Brazil, with President Dina Rousseff getting impeached. The dramatic change in more market-friendly leaders helped stoke the fire of investors looking for outsized returns. It is not something one should rely on as an investment strategy.
A second example of taking advantage of currency weakness has been similar softness in other currencies in North America, like the Mexican peso and Canadian loonie. Those stock indexes are ahead by 12.3 percent and 14.1 percent, respectively. As was the case with Brazil, you can buy these indexes using exchange-traded funds, both hedged and unhedged.
More representative of the difficulty of investing in individual stocks of foreign countries, consider the stock of Blackberry ( BBRY). It began the year at more than $9 per share, and currently sells for about $7. The lesson is the operational results of any individual company are usually going to take far more importance than the currency fluctuation, with a few very rare cases like when the Russian ruble dropped nearly 40 percent in 2015.
Maybe the most prominent example of currency weakness in a country, which still festers today, is the lingering drip of the British pound. If you recall back in June, the Brexit vote immediately chopped nearly 10 percent off the value and rocked the Financial Times stock exchange index lower. A repercussion of pound weakness has been improved results from luxury giants whose customers find cheaper luxury items like high-end watches, purses, bags, shoes and clothing far more affordable.
If you are looking for other safer ways to benefit from currency volatility, consider large online travel brokers Expedia ( EXPE) and Priceline Group ( PCLN), as global travelers will constantly seek to use attractive exchange rates to their benefit.
Using the same premise, you can always buy the large money center banks like Citibank ( C), Barclays ( BCS), and JPMorgan Chase & Co. ( JPM). These institutions make markets in foreign exchange and have many profitable activities that revolve around exchange rate fluctuation.
[Read: Travel Is Booming, but Travel Stocks Are Being Left Behind.]
Don't forget to pay attention to a specific business which may be doing extremely well when you visit your exotic location. It may be part of a publicly traded company you can buy on an exchange in the U.S. or as part of an ETF.
Disclosure: Y H & C Investments owns EXPE, C, BCS and JPM stock.
More From US News & World Report
