Looking for a real bullmarket? It’s in Asia and here’s how you trade it!
Last year our published
outlook for stocks in 2005 was for a top in the S&P500 at 1,245 in Q1.
This bearish outlook was buffeted by our bullish outlook for Asia which we said
would end up showing a bifurcation in the global equity markets in 2005 as
European shares looked set to outperform, while Asian currencies and share
prices stood the best chance to rally against the U.S. dollar. As such, we felt
the best bet of all the markets in 2005 would be in Asia.
Most investors overlook currency risk when
investing in U.S. based ETFs that track foreign markets. The performance in US
dollar terms for a basket of Asian and European markets shows that neglecting
this crucial aspect can lead to serious underperformance.
Last year we listed the currencies expected to
appreciate the most against the dollar were the Mexican Peso and SE Asian
Currencies. As such, we were continually bullish on these markets and their
currencies relative to the dollar.
For example, in our November 20, 2004 ETF Global
Weekly update we wrote, “In Korea the mood remains somber as the BoK cut rates
for the fourth time in an accommodative move after a credit card bust and rising
won have crimped the consumer and exporter. Certainly, none of this sounds
bullish, yet a breakout of the 7-year consolidation pattern certainly would be.
We are on a lookout for a sustained move above 0.092 in the Won and 950 in
Seoul, meaning that EWY might rally above $30.â€
In the chart below we have highlighted with
arrows when we said to begin looking at South Korea as an investment
opportunity. Note that this was well before a breakout in both the Won and South
Korea Stock Exchange resulted in a 50% gain in the
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this joint performance.
By December it looked as if the SE Asian markets
would break out. We then wrote to our clients, “Yet what goes totally unnoticed
by the financial press is that the peripheral countries like Taiwan, Singapore
and S.Korea have some of the oldest free floating currencies and have decided to
let their currencies appreciate against the US dollar.”
“What that means is that the move is already on
and is preceding the eventual move for China. So while investors are sitting on
the sidelines waiting for China to revalue, its neighbors have already done so
and their stock markets and currencies are appreciating in tandem, meaning that
in US dollar terms investing in Taiwan, Singapore or S.Korea would have seen a
20% gain over the past few months.”
“That said, one of the obvious benefactors of
regional growth is South Korea which has a striving goal to become a major
player in both financial and logistical support.”
“Sandwiched between Japan and China, S. Korea
calls itself a shrimp between two whales. Moreover, there is a huge US presence
there not just because of the aftermath of the Korean war, but because the US
was the only country 50 years ago to acknowledge its existence.”
“So despite what we hear about “Yankee Go Home,â€
the US economic presence is not going away and can only aid this “shrimp†as it
tries to compete with its two neighboring giants.”
Alternatively, we said last year that the second
best looking chart pattern was in the EuroTop 100, which was poised for a
breakout. This did indeed transpire with an 18% gain over the past 12 months.
But as we explained before, ignoring currency risk is the primary downfall of
investors in the ETF market.
We warned clients that a likely decline in the
euro would result in a diminished performance if not a flat market for the
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iShares that tracks the European Monetary Union Index.
The subsequent decline in the euro this year
dragged down the performance of EZU until June of this year, when we began
lifting our short EUR/USD position (initiated on January 3) and notifying
subscribers of a potential rally in the euro.
In conclusion, we find that trading the US based
ETFs that track foreign stock markets and their currency rates provides
tremendous opportunities when both the equities and currencies are trending
together.
In the case of our SE Asian plays, this has
resulted in a 50% gain over the past 12 months in a relatively safe investment.
We say safe because South Korea (even after a 50% rally) is still trading at
8.51 times earnings while the Won is still undervalued by at least 30% relative
to the dollar.
Regards,
Jes Black
FX Money Trends
613 4th St Suite 505
Hoboken, NJ 07030
Tel: 646.229.5401
Jes
Black is the fund manager at Black Flag Capital Partners and Chairman of
the firm’s Investment Committee, which oversees research, investment and
trading strategies. You can find out more about Jes at
BlackFlagForex.com.
Prior
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department,
Forexnews.com. After four
years as a senior currency strategist he went on to found
FxMoneyTrends.com – a research firm catering to professional traders.
Jes
Black’s opinions are often featured in the Wall Street Journal, Barrons,
Financial Times and Reuters. He has also written numerous strategy pieces
for Futures magazine and regularly attends industry conferences to speak
about the currency markets.