The best opportunity may have passed, but there's still time to capitalize on the greenback's relative strength. Here are a few investment ideas.
By SmartMoney
Times are tough overseas, but there's never been a better moment to go to Europe. With your portfolio.
A spate of national debt crises and alarms from Greece, Spain, Portugal and Italy have jolted the 16-member eurozone. That's driven the unified currency down sharply from a recent high of 1.509 to the dollar on Dec. 4 to a more moderate 1.3546 to the dollar on Feb. 23. The 10% drop won't mean Americans can vacation on the Continent and get free fromage or cheap Chianti, but for now the schnitzel is less steep and the jamon isn't quite as high-priced.
What world currencies are worth
As every budget traveler -- or investor -- knows, that won't last. The United States has essentially pursued a weak dollar monetary policy since the mid-1990s, when the Clinton administration embraced global trade as a way to make exports affordable. In the uncertainty of a global recession, shrewd investors should look for a way to diversify their holdings because, barring a revolution at the Fed, the dollar will weaken again.
Charlie Gushee, head of Western European equity sales at institutional brokerage Auerbach Grayson, says investors would be smart to play this regional hiccup in the global recovery. But, he warns, the timing is a bit dicey.
"Ordinary investors in the U.S. will still have massive structural overweights in their portfolios -- they all own dollar-denominated stocks, dollar-denominated debt and real estate," he says. "This is a good time to start acting on a longer-term theme of diversifying progressively away from the dollar, because that long-term picture is of a weak dollar. But making a contrarian call now, like looking at a market like Greece that's just been hammered, is a bit like trying to catch a falling knife."
Knife-catching hurts if you do it wrong. If investors don't act at just the right moment -- that is, when the dollar is at its apex -- then this play could leave a costly scar. So it's better not to bet on one specific country's market.
Axel Merk, the chief investment officer and president of Merk Mutual Funds in Palo Alto, Calif., says there are relatively safe ways to play this opportunity, and that diversification is always a good idea.
"I do think this is a major opportunity to go outside of the dollar to take advantage of the recent relief that dollar has had," he says. Investors can buy U.S.-based multinational companies that get most of their profits from overseas, although that buy carries the risk of seeing them victimized by a lack of credit. Even the strongest companies depend on credit to finance their overseas profit surges.
International bond mutual funds like the Dreyfus International Bond I (DIBRX) and the Templeton Global Bond Advisor (TGBAX) provide another approach, but they run the risk of having returns altered by interest-rate changes.
Gold is another option, Merk says, but it remains volatile and shouldn't command a disproportionate share of anyone's portfolio. Merk's own no-load mutual funds -- the Merk Hard Currency (MERKX), up 13.8% over the past year, and the Merk Asia Currency (MEAFX) fund, up 0.7% over the past 12 months, generally take a short bias to the dollar. The Merk Absolute Return Currency (MABFX) fund, down 1.9% for the same period, is neutral. The Standard & Poor's 500 Index ($INX) is up 47.7% in the past year, but that's been a volatile and nerve-wracking ride.
Phil Maisano, vice chair and chief investment officer of Dreyfus and chief investment strategist at BNY Mellon Asset Management, says the best currency opportunity has already passed, but he still recommends an adjustment while the window is open.
He says some U.S. investors invest too little overseas and are therefore missing out on opportunities to diversify their equity and fixed-income holdings.
"In 2009, a generally declining dollar benefited investors that bought overseas assets," he writes in his 2010 Outlook. "While the prospects for continued dollar weakness are not as strong in 2010, international diversification is still important. Investors shouldn't look to dollar weakness as the major reason to diversify holdings. Currency changes tend to be cyclical in nature and going global is more about eliminating the home bias that can limit the potential of investor portfolios."
Merk is more pointed. He says Federal Reserve Chairman Ben Bernanke's emphasis on a weak dollar is unsustainable, but because it's still the U.S. policy, this is a good time to seek out foreign currency-denominated instruments.
"U.S. policymakers are under this illusion that you can depreciate yourself into prosperity and your exports will go up and you'll have eternal growth," he says. "It's an illusion for an economy that's developed to try to compete on price. We will never export sneakers to Vietnam."
So diversify, diversify and maybe fly across the Atlantic for a week. Burgundy and Beaujolais will be a relative bargain, but not for long.
This article was reported by Will Swarts for SmartMoney.
From MoneyCentral