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The Secret to Turbocharging Your Profits in Global Markets
If you are new to foreign investing, the importance of currency movements can be a hard thing to get your head around. Yet, understanding how your position as a U.S. dollar investor in foreign stocks impacts your returns as an investor in foreign stocks and bonds is the secret to generating outsized profits in global stock markets.
Superior Economic Prospects...
If you see a country that boasts strong economic growth, high savings and low debt, and is able to sell goods, services or natural resources that the rest of the world wants to buy, you'd expect this to be reflected in the performance of a country's stock market.
A good illustration of this is Brazil -- a country whose economy and prospects have improved remarkably since President Luiz Inácio Lula da Silva came to power in 2003. Brazil's Rio de Janeiro was recently picked to host the 2016 Olympics, beating out Chicago, Madrid, and Tokyo. Brazil's sovereign debt, so close to default earlier in the decade, has been rated investment grade by Standard & Poor's, Fitch, and Moody's. JPMorgan Chase recently increased its forecast for Brazilian economic growth next year to 6.2% from 5% on rising domestic demand. As Brazilian President Luiz Inácio Lula da Silva recently proclaimed to the International Olympic Committee, "Our time has arrived. It's arrived!"
Certainly, 2009 was a very good year for the Brazilian stock market. If a local Brazilian investor invested in a local Brazilian real-denominated index fund on the last day of 2008, he ended the year up about 82.6% a year later.
That's certainly much better than if you invested your U.S. dollars into the S&P 500, and ended the year up 23.5% over the same period. 
...Boosted by a Soaring Currency....
But what would have your returns been if instead of investing in the S&P 500, you had invested in Brazil in 2009 through an exchange-traded fund like the iShares MSCI Brazil Index (EWZ)?
Well, thanks to the Brazilian real's close to 40% appreciation against the U.S. dollar in 2009, you would have made much more than the 82.6% returns made by a local Brazilian investor.
The "extra" return you see on the chart -- the difference between the performance of the Bovespa index and the iShares MSCI Brazil Index (EWZ) -- holding constant the differences in the way the indexes are calculated -- is due to the appreciation of the Brazilian real versus the U.S. dollar.
In the case of Brazil in 2009, as the U.S. dollar weakened -- and the Brazilian real strengthened -- more U.S. dollars were put back in your pocket as an investor in Brazilian stocks.
The Lesson Is...
As the example of Brazil in 2009 shows, the impact of foreign currencies on your U.S. dollar investments can make the difference between double-digit percentage gains -- or triple-digit ones.
Understand that once you've invested in a foreign stock or exchange-traded fund (ETF), you've essentially taken your money out of U.S. dollars and put it into a foreign currency.
For investors in Brazil, currency appreciation was a big positive in 2009. For unlucky investors in Hugo Chavez's Venezuela, which just announced a devaluation of its currency, the bolivar, this was negative.
And that's why investing in a country with an appreciating currency is the secret to turbocharging your profits in global markets.
Sincerely,
Nicholas A. Vardy
Editor, The Global Guru
P.S. Subscribers to my newsletter, Global Stock Investor, have been taking advantage of currency movements to make money in many areas across the globe. In fact, as of January 11, 2010, we are profitable in 12 of 13 open positions. That's 92% winners, with an average of more than 25% profits per position, and single-play profits as high as 49%. To learn more about Global Stock Investor click here .
P.P.S. My publisher, Eagle Financial Publications, is now on Facebook. Click here to see our page and be sure to become a fan when you get there.
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