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Why some dollars are worth more than others to investors

The key to international investing is not foreign equity funds, says this U.S. analyst, but the countries with the best currencies, like Canada.

Making money on money may once have seemed like the kind of thing only hot-shot international traders could really do successfully. But there are so many funds tracking so many different things these days that currency investing can be done pretty easily.

It’s just a matter of picking the right currency and the right time. This requires a bit of homework and an idea as to what makes currencies tick. Why was the Canadian dollar a 67¢ weakling for so long before it turned around and started kicking sand in the face of the greenback (and into the machinery of Canadian exporters as well)?

It wasn’t just the weakness of the U.S. dollar that did the trick. But how much came from demand for energy and commodities and how much from the retreat of the U.S. dollar?

One U.S. advisory that recommends investing in currency values is Richard C. Young’s Intelligence Report. It’s part of an overall strategy that hinges upon dividends, income and compounding. The international part of this advisory’s strategy runs on a measurement called purchasing-power parity (PPP), which projects long-term currency values.

According to Mr. Young’s most recent measurements, the Canadian dollar is one of the six best currencies in the world to buy right now. But it’s not number one. That goes to an Asian currency. We’ll sort out all this money in a moment.

As we usually do when we turn to this advisory, we’ll also review the Top 10 Common Stock Countdown.

Pick your country

Here is Mr. Young’s general advice to his readers when it comes a good investment portfolio with retirement in mind: 50 per cent fixed income, 45 per cent equities and five per cent gold.

One way to achieve this is what he calls a three-proxy portfolio: Dow Diamonds Trust (DIA) which tracks the Dow Jones Industrials, of course, not the gems; streetTRACKS Gold Shares (NYSE-GLD) and the Vanguard GNMA Fund (VFIIX), or “Ginnie Mae” fund based on Government National Mortgage Association. When he went to press last week, this three-pronged portfolio was down 2.3 per cent for the year, compared to a loss of over 9 per cent for the S&P 500.

International investment is part and parcel of his strategy. And as a rule, Mr. Young prefers picking individual countries, and their currencies, rather than relying on a fund manager to decide that investors should have 15 per cent of a portfolio in Chinese equities, 10 per cent in Taiwan and so forth.

“For the astute investor,” he says, “a country-based approach offers the opportunity to profit from currency fluctuations, dividend yield, and capital appreciation. International investment without considering all three components is incomplete, at best.”

Here is where PPP — purchasing-power parity — comes into play. Mr. Young has developed an “arsenal” of relative PPP charts to estimate long-term currency values. The editor admits that PPP is a “poor indicator” of short-term currency fluctuations, but he assures us it is a “long-term standout.”

The idea is to find the undervalued currencies and the attractive equity markets and lay one over the other. When you find the countries that have both, you’re on to something.

So much for the methodology. Who actually comes out on top in this duel of currencies?

A growing class of millionaires

The winner is: Singapore. The dollar of this city state republic is trading at a discount to fair value. It’s also due to benefit as China appreciates the yuan in order to cool down its overheated economy. That in turn will give Singapore an advantage in its competition over export markets with China.

“The economic picture in Singapore offers the patient investor much promise,” says Mr. Young. “Singapore is transforming itself into a world-class knowledge-based economy.”

Biomedical research and banking are at the heart of Singapore’s progress. More than 100 foreign drug makers and biomedical companies have set up shop in Singapore. They’re attracted by the republic’s strict enforcement of patent laws, highly educated workforce and friendly business climate.

Similarly, Asia’s growing class of millionaires — 30,000 new ones in China each year — are attracted to a banking system with a low rate of corruption, rigorous legal system and secrecy laws that are even stricter than Switzerland’s. Singapore is fast becoming Asia’s offshore financial centre.

The way to get a stake in this growth is via an exchange-traded fund, iShares MSCI Singapore (NYSE-EWS), according to Mr. Young. Buy or add to shares on weakness, he tells his readers.

But stay out of Europe.

The euro is doomed

At the opposite end of the spectrum from undervalued Singapore is overvalued Europe. Mr. Young does not like the euro. Not now, not ever.

The big negatives for Europe, in his opinion are: 1) an overvalued currency, and 2) a currency based on an untested money experiment that is likely doomed in the long run. “The euro is simply a bad idea,” states the editor flatly. “You cannot successfully set monetary policy for a group of independent countries with varying degrees of economic growth.”

Mr. Young foresees a collapse of the European Union. “A populace faced with stagnant economic growth is unlikely to view kindly monetary policy set to prevent inflation in foreign countries.” Whatever measures the government on the spot takes to counteract that monetary policy are liable to create still more problems.

“Without control over monetary policy, cries to leave the EU will grow louder,” he adds, “and any politician interested in job security will fold under the pressure.”

Whether or not the euro and the EU survive all this potential turmoil, the currency is overvalued now, according to Mr. Young’s assessment. Avoid the euro.

Japan is cheap, so is Malaysia

In between the attractive harbour of Singapore and the treacherous shoals of the European Union are six international havens for investment. They are: Japan, Switzerland, the Nordic countries, Malaysia, Australia and Canada.

They are not all desirable for the same reasons. Japan, for instance, is just plain cheap. The currency is cheap, the stock market is cheap and sentiment is negative.

The Swiss franc, says Mr. Young, “is a safe-haven currency with a small float.” The Nordics are Sweden, Norway and Denmark, who remain committed to a single currency — the krone or krona, the spelling varies from country to country — and have thus far resisted the European Union and the euro.

“The Nordics are a nice way to take advantage of growth in emerging non-euro European countries like Latvia, Lithuania and Estonia.”

Meanwhile, the editor’s PPP valuation charts show that the Malaysian ringgit is extremely undervalued and, like the Singapore dollar, will rise when China appreciates the yuan.

Mr. Young recommends investments for two of these currencies, iShares MSCI Switerzland (NYSE-EWL) and T. Rowe Price Japan (PRJPX), but no specific investment vehicles for the other two.

He does have very specific recommendations, however, for the two overvalued currencies he likes.

Natural resource powerhouses

Australia is one of the nations with an overvalued currency that Mr. Young recommends. Canada is the other. That won’t be big news in either country, but his reasons for sticking with the currencies are noteworthy.

Both the Australian and Canadian dollars are overvalued on a relative PPP basis, he says, but “both countries are natural resource powerhouses. Burgeoning demand for natural resources should counterbalance the potential negative effects of a reversion to relative PPP currency values in coming years.”

He has recommended iShares MSCI Australia (NYSE-EWA) and Fidelity Canada (FICDX) to his American readers as entry vehicles into the two currencies. If you bought them on his initial recommendation, he adds, you have made big gains. A little trimming might be in order.

In short, if Canada remains one of the best places in the world in which to invest, it all gets down to the same reason: our resources remain in demand.

When we turn to Mr. Young’s Top 10 Common Stock Countdown for U.S. investors, we find forty per cent in foreign stocks.

Top 10 stocks for March

Here are the ten best stocks for American investors today, in the opinion of Mr. Young.

1) St. Joe (NYSE-JOE), owner of prime Florida coastal property waiting for retired baby boomers to arrive. Shares are at bargain levels.

2) Cresud (NASDQ-CRESY), Argentinian firm benefits from rising meat consumption in China by raising both cattle and the grain to feed them.

3) Xstrata (LSE-XTA.L), the Swiss firm that gobbled up Falconbridge, may now be bought by the company that acquired Inco.

4) Unilever (NYSE-UL), the great British soap company, gone multinational.

5) PepsiCo (NYSE-PEP).

6) Duke Energy (NYSE-DUK), a utility that should benefit from capital expenditure to upgrade the power transmission system.

7) Plum Creek Timber (NYSE-PCL) may soon be providing feedstock for the production of ethanol.

8) Federated Investors (NYSE-FII), an investment management firm that makes 60 per cent of its revenues in fixed income.

9) Sysco (NYSE-SYY), a food products distributor to restaurants, healthcare facilities and other lodging establishments.

10) Royal Dutch Shell Petroleum (NYSE-RDS.A).

Mr. Young has one more international recommendation to add at the end of this month’s issue. It’s another exchange-traded fund, iShares MSCI Hong Kong (NYSE-EWH). His reason: “In terms of international commerce, Hong Kong has evolved as the world’s global supply chain headquarters.”

This is the time of year when many Canadians trade in their dollars for foreign currencies in order to fly off elsewhere. But if Mr. Young is right, you can also do very nicely by trading in your dollars for exotic foreign currencies without going anywhere at all.