The Dollar is Ripping, And Foreign Firms Take Advantage
International trade is highly sensitive to currency rates. Foreign manufacturers and American firms share a highly competitive global marketplace.
This is evident now; the dollar is 12.4% stronger against a trade-weighted basket of currencies, and 20% to 40% stronger against some of the country’s largest trading partners (Korea, Jana, and the Eurozone). This implies, for example, that an American tourist with $100 in Tokyo can buy 40% more stuff – or an electronics manufacturer in Korea can build gadgets 30% cheaper than an American competitor.
The strong dollar trend started in early 2022, when the Fed started raising rates. With treasuries yielding circa 4% (vs 1.5% at the end of 2021), investors that previously looked for yield in riskier markets bring their capital to the US. Moreover, few – if any – market analysts expect any inflection given the widening trade deficits in energy-dependent Japan, Korea, and the Eurozone.
Where to Look for Opportunities- Domestic Importers, ADRs, and ETFs
Investors have traditionally looked at domestic importers as a play on a strong dollar. Retailers Walmart, Target, and Home Depot are the three largest individual importers of goods by volume (container units), and the strong US$ cuts the price they pay when buying inventory
However, the markets offer two simple ways for American investors to invest in foreign markets and companies – Country ETFs, and American Depositary Receipts (ADRs).
Country ETFs offer exposure to the wider equity market in foreign countries. ETFs of high-grade markets with a heavy presence of exporters gaining from a strong US$ include: EWG (Germany), EWJ (Japan), EBY (Korea).
However, ADRs offer direct exposure to companies gaining from the strong US$. ADRs are “mirror securities” registered, regulated, and listed in the US, but that replicate the performance of foreign listed stocks. For example, TM – Toyota Motors ADR listed in the NYSE – “transfers” the performance of the stock traded in Tokyo to its ADR listing.
Some liquid, high-grade ADRs of foreign capital goods manufacturer listed in the NYSE are:
What could go wrong with this type of strategy?
ADRs are indirect investments in foreign markets. These markets carry risks that may be unfamiliar to American-based investors, from political environments to economic policies and regulation. Developed markets tend to have a more stable backdrop compared to emerging markets, but they still include risks including currency and sovereign, credit rating, liquidity and volatility, corporate governance, etc. Investors without foreign markets’ experience should consider educating themselves in their target market prior to execute investing.
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