Has the high US dollar created new investment opportunities?
Over the past two years the US dollar has strengthened to a 12-year high thanks to commodity price declines, the relative strength of the US economy, global central bank policies and a flight to safety. The UAE dirham is pegged to the US dollar, so investors here have the same advantages of a strong currency.
Therefore if you can find attractively priced assets in currencies that have devalued against the US dollar, this is a very good time to buy if you hold dirhams. This is a window of opportunity that will not last forever, as a weakening of the US dollar in March reminded us. Any global traveller can spot this.
“I presently spend a lot of time in South Africa on business and you just can’t help but notice how much further the dirham goes these days,” says Nigel Sillitoe, chief executive of the Dubai-based market researcher Insight Discovery.
“If you are thinking of buying, say, real estate in this beautiful country, then I don’t suppose the timing has ever been better for a dirham investor, just so long as you keep a close eye on the ever changing political scene.”
Private investors may also choose country funds or ETFs, or individual stocks to gain exposure in countries now cheaper thanks to the strong dollar. But where are the best bets for UAE investors with their strong dirham right now?
The Australian dollar today is worth about a third less than it was two years ago because Australia is one of the world’s biggest commodity exporters, and commodity prices have collapsed. For investors looking for geographical diversification and political and economic stability Australia has always been a standout option.
“There never was any question that Melbourne is a great investment,” Philip Dalidakis, the minister for small business, innovation and trade for the state government of Victoria, told The National during a visit to the UAE for the Gulfood exhibition last month. “But it is clearly even better value now with the lower Australian dollar.”
The 39-year old minister was also in the UAE to promote his new A$60m (Dh168.8m) incubator for high technology companies, LaunchVic, chaired by the Lebanese-Australian Ahmed Fahour. Still cheaper Australian equities and real estate are more obvious targets for individual UAE investors thanks to the current strength of the dirham.
Towards the end of last year it became very popular among foreign exchange dealers, led by Goldman Sachs, to project an ever-rising US dollar with euro parity and perhaps a $1 British pound sterling on the horizon. That was understandable perhaps after the Fed raised its key interest rate for the first time in nine years in December.
But since then the Japanese move to negative interest rates and a collapse in US treasury bond yields has pointed to a less glittering future for the dollar.
“Since the collapse of the US Federal Reserve rate hike expectations the primary bullish driver of the US dollar is gone,” says Peter Rosenstreich, the head of market strategy at Swissquote Bank, which opened a branch in the Dubai International Financial Centre just over two years ago.
“And while the market has overshot itself by removing probable rate hikes, further upside in the US dollar should be limited. The dollar will only move forward slightly in 2016 … the rapid moves seen in 2015 and additional significant appreciation is unlikely in our view.”
Where else then in the world should investors be searching for investment opportunities before the window of opportunity created by the high US dollar closes?
Ask the Dubai hotelier Kalaf Al Habtoor, who bought the Imperial Hotel in Vienna last month for a relatively modest $79m. The relatively weak euro was doubtless a consideration in this transaction.
Mr Al Habtoor has also acquired two hotels in Budapest in recent years, taking advantage of what most industry analysts regard as Europe’s cheapest real estate market, where apartments sell for a sixth of London prices.
“I have not seen this much activity before,” said Robert Weiner, the sales director of Property-Hungary.com. “But it is more about local investors getting out of bank deposits than the cheap US dollar.”
He noted that where the most-favoured central European states stand out – Hungary, Poland, Serbia, Slovakia and the Czech Republic – is their higher than average GDP growth rates, low salaries and European Union membership; Serbia as an EU candidate country has also benefitted from substantial investments from Abu Dhabi, particularly in agriculture.
In Asia the concern for dollar-linked investors is that they may be a little too early for the best bargains. The People’s Bank of China only started to devalue against the dollar last August in a shock move that plunged global financial markets into chaos in a normally quiet month.
Some of the biggest hedge fund names in the world are loading up on bets that China will sharply devalue its currency this year, with Kyle Bass, Stanley Druckenmiller, David Tepper and David Einhorn all positioned for sharp devaluations in the yuan.
If, say, the Chinese yuan was to follow the Australian dollar and devalue by 30 per cent against the US dollar, as the most pessimistic forecasters expect, then this would also take down many other Asian currencies.
The Asian markets that crop up most on investor favourites lists these days are: Vietnam, Thailand and the Philippines, reckoned to be 15 to 20 years behind China in development terms and now heading into a high-growth phase.
“People always seem to get China’s link with Vietnam the wrong way around,” says Kevin Snowball, a veteran fund manager and chief executive of PXP Vietnam. “China has a huge trade deficit with Vietnam and money continues to move out of China to Vietnam as a low-cost manufacturer.
“In the past four years I’ve watched Vietnam become a huge force in electronics from nothing. All we had before was textile manufacturing and now half the Samsung mobile phones for the world are made here.
“At the moment the Vietnamese dong is essentially pegged to the US dollar, with government policy to weaken the pivot rate by 1 to 2 per cent a year,” he added, although agreeing that this would most probably change if the yuan was to be substantially devalued.
Then its satellite nations would also be forced to follow suit and that would be bad news if you had just invested your US dollars in these markets. But not everybody is convinced that the yuan will devalue further.
Swissquote’s Mr Rosenstreich argues: “We suspect that moving forward the yuan will not devalue significantly against the US dollar. Recent comments indicate that for now stability will trump free currency movement and lowering expectations for devaluation will lessen motivation to sell yuan.
“In addition, massive fiscal and monetary stimulus by Chinese policymakers should lift domestic demand, which in turn will lessen yuan liquidation pressure. China also has $3.2 trillion in reserves, plus a current account surplus… plenty of firepower to stop speculative attacks.”
All the same, right now US dollar investors have the currency advantage in many markets. In the industrialised world Canada is another standout with its dollar laid even lower than its Australian counterpart owing to the commodities crash.
Canada remains a stable bastion of democracy in the territorially most secure North American continent. Bombed out shares in its commodity producers will eventually recover and with them the Canadian dollar, note analysts.
At the opposite end of the risk spectrum bargains abound, including Brazil, Argentina, South Africa, Nigeria, Kenya and Russia. Should you really want a bargain then brokers point to some Russian equities that are selling on a price-to-earnings ratio of around four with the rouble down 50 per cent against the US dollar.
Caveat emptor, what has gone down in value can always go lower. Casey Research recently flagged up Brazil where the EWZ index tracker is down 74 per cent since 2011 and the Brazilian real has lost 59 per cent of its value in the same period. Is that not a great buy?
“The bottom of a market doesn’t happen until people take any price to get out,” said its report. “That has not happened yet in Brazil. There is still no panic in the air.
“The time will come to buy Brazilian stocks. It’s just not here yet. Stock prices are a fraction of what they were in 2011, but they can get worse. If a stock falls from $20 to $2, it can still fall 50 per cent more to $1. Brazilian stocks can still get cheaper.” So wait for a sign Brazil’s deep recession is ending first.
Analysts reckon a less risky choice would be Indian equities, which are expected to benefit from high GDP growth rates in the coming few years and are also on sale with the rupee low against the US dollar. Or UK expats might think the Brexit referendum on the European Union is hammering the pound sterling unnecessarily and send money home.
If you can find the right investment deal in a country where the dirham is now at a record high valuation thanks to its US dollar-peg, then clearly this is a good time to buy.