Are You Denominated In The Right Currency?
Weekly Notes With Tiho — Issue 8
Location: Hong Kong & Shanghai, China
I’ve been traveling a lot lately.
Mainly around Asia, until next month when I leave for Europe.
Ho Chi Minh City, Singapore, Kuala Lumper, Bangkok, Hong Kong and recently the metropolis center of Shanghai.
Side note: The photo above was taken on my iPhone 7 last week.
Each one of those cities has a different currency.
This makes the world of foreign exchange fascinating, especially to travelers and cross-border investors.
Being denominated in the right currency can dramatically boost returns and protect against the loss of purchasing power.
A great example of this is Australian property market.
Australian Property Hasn’t Actually Done That Well
Fellow countrymen of mine would usually say to me how great Australian property market has done over the last several years.
“Melbourne apartment worth $450,000 in 2013 is now valued at around $700,000.”
“That is an increase of over 55%!”
I usually follow those statements by saying: “Yes, in Australian Dollars, that has been a solid return.”
The gentleman would go on saying: “What other dollars do we use here? Of course in Australian Dollars.”
Australians are notorious for having a home country bias as investors.
Yes, it’s even more pronounced than in the United States. In my opinion, it’s even worse than the surveys suggest.
If we were to measure the same apartment return in American Dollars, the story would be very different.
In early 2013, the Melbourne apartment worth AUD $450,000 would have been worth USD $475,000.
Fast forward to mid-2017, this same apartment is worth AUD $700,000, which is only USD $511,000 (medium exchange rate for the month of May 2017).
Therefore, over the last four and half years, the appreciation of this asset in US Dollar terms has been a tiny 7.6%.
Not 7.6% per annum… but 7.6% for the overall period.
Potentially, there could be some rental income added to this equation — but with such low rental yields and high taxes — the overall total return would not change that much.
Despite a euphoric residential boom in Australia, this apartment has not been such an impressive asset to hold on the international stage.
Other asset classes have done much better.
Making 7% in total over a five-year period is quite frankly... crap!
Furhtermore, let us not forget about body corporate fees, local council land taxes, mortgage costs, property manegement fees and so forth.
We could even entertain an idea, when measured in USD terms, a local Aussie investor might have made a loss?
The Importance Of Being In The Right Currency
The Australian Dollar was trading above parity in February 2013. As an Australian, I know this very well.
It was around this time when I shorted the currency — trade I still hold.
My old readers from The Short Side of Long blog might remember this trade, which was disclosed in real time.
This is also the time when I denominated all of my liquidate assets and cash equivalents out of Australia and into US Dollars & Hong Kong Dollars.
As a perpetual traveler, this trade has been a great benefit to maintaining my purchasing power.
It has also protected my net worth on the international stage when measured against other currencies.
Investors who moved into US Dollar in middle of 2011, or even around early 2013, have benefited tremendously.
Greenback appreciated against almost every currency in the world.
However, around March 2015 every man and his dog became US Dollar bulls. Such a sharp rally has removed QE hyperinflation fears out of investors mindset.
Bullish sentiment was only strengthened by Federal Reserve's desire to slowly hike interest rates, while the majority of the world remains very accommodative (monetary policy wise).
Optimism on the greenback hasn’t really let up, despite a prolonged consolidation.
Earlier this year, I tweeted on a few occasions about the Merrill Lynch Fund Manager Survey warning that the US Dollar is the most overcrowded trade.
Year To Date Performance
Such universal bullishness has lead to a poor year to date performance for the US Dollar.
Just about every currency around the world is up this year.
Looking at the European continent the Euro is up over 6%, Pound is up almost 3.5%, Franc has appreciated by 4.8% and Swedish Krona by 4%. Polish Zloty is the star performer, moving up almost 11% year to date.
In Asia the Malaysian Ringgit is up close to 5%, Indian Rupee is up 5.2%, Japanese Yen is up 5.6%, the Korean Won has appreciated almost 7% and Taiwan Dollar by impressive 7.1%.
Mexican Peso is a star performer against the King Dollar, appreciating close to 12.5% year to date.
My clients have benefited from this appreciation with my timely call to buy Mexican equities in middle of January.
Even Gold has gained 10% against the US Dollar this year.
What Can We Expected In The Second Half Of 2017
Has the US Dollar bull market ended?
Will global currencies start appreciating against the greenback?
Is it time to diversify out of Dollars and into other currencies?
These are very important questions.
Currencies tend to have multiple short trends, fooling and tricking investors many times over.
At the same time, there is usually a dominant and prevailing currency trend which lasts for many years.
You need someone with an accomplished level of financial expertise to make the right currency denomination decisions on your behalf.
Someone with the ability to read these trends and expose your portfolio the correct way, so that you can protect your purchasing power and grow your net worth.
If you would like to know how I am positioning my client’s portfolios — get in contact by clicking below and filling out the brief survey.
I’ll get back to you within 24 hours.