How You Can Profit from the Currency Wars
By Sasha Cekerevac for Investment Contrarians |
Recently, we have heard a lot about currency wars being waged by various nations around the world. To those who are unfamiliar, “currency war” is a term that refers to countries that are actively looking to devalue their currency to help stimulate export growth and their domestic economy.
Investing in stocks in this type of environment can be tricky, as one needs to add additional variables to the analysis. Having a strong market sector, solid long-term fundamentals of the individual stock, and a favorable currency direction can help when considering investing in stocks.
While many look to the Federal Reserve as being the most active in trying to devalue the U.S. dollar, I would point to Japan. Newly elected Japanese Prime Minister Abe has been vocal about demanding massive and unprecedented monetary stimulus by the Bank of Japan to help stimulate the Japanese economy.
Large institutions interested in investing in stocks certainly have jumped on the export-oriented market sector, as Japanese stocks are up approximately 24% since mid-November, when elections were announced, and the yen is down in value by approximately 10%.
However, this is not a short-term phenomenon. I believe the yen will continue to remain weak for a long time, and this will benefit the Japanese export market sector. Those interested in investing in stocks could look to equities in Japan that will benefit from the yen’s devaluation.
One market sector that also has strong fundamentals in the U.S. is vehicle sales. The U.S. had extremely strong car sales in 2012, and I expect 2013 to be just as strong. When combined with a further lowering of the Japanese currency, this will further help the Japanese automotive market sector.
Investing in stocks in the automotive market sector is slightly more difficult because of the economic problems in Europe. The market sector itself will continue to remain sluggish on the European continent, and this makes analysis that much more difficult.
Having said that, two examples of recent strength in the automotive market sector from the currency devaluation of the Japanese yen are Toyota Motor Corporation (NYSE/TM) and Honda Motor Co., Ltd. (NYSE/HMC).
Chart courtesy of www.StockCharts.com
Timing is very important when investing in stocks. During the drop from 2007 to 2009, very few people were comfortable accumulating shares after such a dramatic drop, which is unfortunate, as that was a great buying opportunity. Investing in stocks when others are selling can be quite profitable over the long term.
We can see two distinct long-term trendlines on the 10-year chart above. From the lows of 2003–2007, the long-term uptrend was broken, and the shares declined dramatically.
With the automotive market sector having been in serious decline during the Great Recession, this made perfect sense. However, 2012 was an extremely strong year for car sales in the U.S. and subsequently we have just seen the stock break up through its long-term downtrend.
In addition to strong car sales in America, the lower Japanese yen is that much more advantageous to the automotive market sector in Japan.
One danger when it comes to investing in stocks is rushing into a market sector following a significant move. Toyota is already up approximately 25% over the past couple of months, a substantial move for a company of its size.
I think we’re likely to see some profit-taking in both the Japanese automotive market sector and the Japanese currency. Nothing moves in a straight line.
However, I do believe the Japanese yen will continue to weaken versus the U.S. dollar for an extended period of time. The U.S. Federal Reserve is much closer to ending its monetary stimulus versus the Japanese central bank, which is just now embarking on a new money-printing regime.
This type of move can last for years. The Japanese yen weakened from approximately 78 per U.S. dollar in October 2012 to approximately 90 in early January. That is a substantial move in a very short period of time. Having said that, over the next couple of years, I can certainly see the Japanese yen weakening past 110 to the U.S. dollar.
Combined with a low interest rate environment in America for the near future, the Japanese automotive market sector should have strong fundamentals as a wind at their back.
Investing in stocks is never easy, and I would not recommend buying this market sector currently, as the move appears to be overextended. However, I do suggest adding it to one’s watch list and looking for opportunistic entry points over the next year or two.