International Investments - Currencies That Sneak Up

By Gary Scott

International investments can be like parts of the morning farm routine here that involve our hound dog Ma and our smarter than dogs chickens.

Each (the dog and the chickens) deems to ignore the other as though they do not exist, except when the chickens decide to graze on Ma’s territory which is divided by an invisible line near the front porch of our summer house. No one can divine this demarcation except Ma and of course the chickens.

Ma stands at point, stiff, tail straight out, glaring and daring. “Just try to cross the line,” she growls. The hens of course are casually sincere, grazing along acting as if they are not aware of what is about to emerge. Finally, they cross the magical border and Ma explodes. They scatter out of the sacred territory and once again all is well. Except the chickens never give up. For some reason, out of 250 plus acres, the grazing seems better in the small 5,000 or so square feet that is within Ma’s domain around the house. Rather than confront, they sneak in while Ma is not watching. See if you can see the hen in the background sneaking up on Ma while she is looking the other way. I had a hard time taking this shot because I was shaking so hard with laughter.

On the subject of borders and sneaking, we have been looking at the benefits of investing in emerging currencies so we should be aware that the Mexican peso credit spread to the US dollar has been sneaking up for some time.

This is due in part to general disturbances in the market caused by election jitters prior to the July 2 election. The leading candidate is believed to be the best for the Mexican economy and has had a comfortable lead according to polls. The rub is that leftists have recently gained increasing popularity in the polls. Their election promise is that Mexicans with the lowest income should have a 20% increase in wages. They have not explained how to pay for this and investors believe this could lead to rising inflation that could push the peso down.

The 10-year yield spread to the US dollar recently reached 400 bp. This means you could earn 4% more on a ten year Mexican government peso bond than on a ten year US government dollar bond.

Not everything about the peso is rosy. If US economic problems cause the US to buy less Mexican goods, the peso could fall. If the US dollar weakens, the peso could drop. Mexico’s stock market is on Keppler’s low value sell list. If the Mexican stock market drops, this could bring the peso down as well.

There are lots of ifs and coulds but the known is, you earn about 4% more per annum with the Mexican peso than the greenback. So a diversification of some dollars into the peso makes sense.

Here is a comparison of Keppler’s analysis to compare with China and India, two currencies we reviewed last week.

Watch for the release of consumer prices on Thursday (June 8, 2006). Other peso fundamentals are not bad (though not the best). Mexico has a small trade deficit (-4.9 billion) and current account deficit (-5.4 billion), but strong foreign reserves of $75.6 billion.

Also keep an eye on Mexico’s oil sector. Mexico’s large oil reserves give the peso some long term strength.

Here is a good article in the Chicago Tribune: “Analysts predict that Mexico's oil reserves, second only to Canada's in filling up U.S. gasoline tanks, could dry up within a dozen years. Meanwhile, Pemex lacks sufficient money to repair antiquated pipelines and search for more deep-sea deposits.

“One solution would be outside investment. But almost all Mexicans oppose loosening their constitution to allow private or foreign interests to break the government monopoly and hold a stake in the nation's oil.” You can read the entire article at The Chicago Tribune

Look for short term emotional conditions that drive the peso’s interest rates up. Investments made at that time are likely to stay closely related to the US dollar but with much higher yields.

There could even be a Borrow Low-Deposit High play. You can borrow dollars now in the 5% range and invest in pesos at 8.93%.

For example, a US treasury bond that matures in 2013 yields about 5.08%. A Mexican Bono that matures the same year yields 8.93%. You can borrow US dollars from Jyske Bank right now at 5%.

If you invested $50,000 and borrowed $100,000 to invest in this bond, your return would be $13,395 (8.93% of $150K) less $5,000 interest (5% on the $100,000 borrowed). The $8,395 income represents a 17.8% return.

If the dollar falls faster than the peso, extra profit would be made. The risk of course is that the peso falls against the greenback in which case that extra profit could be lost or worse. Do not risk more than you can afford to lose!

Enhance great profit potential with a diversified portfolio of emerging currencies through a MultiCurrency Sandwich. Learn how at garyascott.com/catalog/bldh.html

Learn about investing in emerging currencies, gold, silver, Ecuador, import-export, overseas markets and more. Join Merri, Thomas Fischer from Copenhagen and Steve Marchant from Ecuador and me at our September 15-16-17, 2006 International Business and Investing Made EZ course in North Carolina. Review where to invest and do business now and learn which markets and currencies may be strong in the year ahead. Learn more about Ecuador import and export from Steve. Our May course was overbooked and the September session is filling up fast. Our free accommodations are reserved on a first come first served basis so do not delay! DETAILS

Gary