The USD effect
I want to start with a graph of EURUSD, because it has such profound effects on the market when it starts moving.
With the risk of being called something of a Chartist, to me this is a significant move. We are breaking out of a 2 year side-way trend. This could be the beginning of the normalization of major currencies, where we see EURUSD moving back to it’s previous range 1.20-1.50 which lasted for about 10 years. What is a normal range though? It all depends on what time perspective you take. If we look at 30 years of data, we are today already very close to the average exchange rate. The 360 month moving average is at 1.21 and the 500 month moving average is where we are now, at 1.18. If EURUSD moved to for example 1.4 over the coming year, that would definitely have profound effect in the stock markets and on all ours portfolio returns.
Exporters vs domestic
The kind of currency move we see now, leaves its mark on a Global portfolio and it’s returns. The effect is largest for domestic companies. For example if we take my largest holding Skandiabanken, which is a Nordic online retail bank, generating majority of it’s revenue from Norwegian Krona (NOK). Since all it’s costs and revenue is in NOK, its a purely domestic company. So when USDNOK moves, the portfolio experiences the full currency move, whereas the fundamentals for the company stays the same. Since investing in Skandiabanken I have realized an extra 6% return from the NOK strengthening, pure luck!
In comparison my holding in LG Chem, is traded in Korean Won (KRW). But the company exports all over the world meaning a lot of it’s revenue is priced in USD. So if KRW strengthen against USD, the company will earn less in KRW terms and the stock should fall. At the same time the KRW stock price is worth more in USD terms, so the effect negate each other.
This means that companies that mostly sell domestically adds an extra component of FX-risk into the portfolio. To make it even more complicated, the domestic company might have it’s cost in USD and chose to either hedge it or leave the currency risk open. If you as an investor compare yourself to a benchmark, your definition of taking risk in this sense, is if you have another mixture of exporters vs domestic companies, per market, compared to the benchmark. This will make you over and underweight a number of currencies. It all sounds very complex, but since weightings of for example MSCI World is so heavily tilted to the larger markets and large companies, in effect, you mainly have under/over exposures to a few major currencies (USD, EUR and JPY). The tricky part is that you won’t really notice this effect, before one of the major currencies really start moving, like now.
So what’s the point of this analysis? My point is that major benchmarks is made up of large companies with revenues worldwide, so the majority of your portfolio from a Global benchmark will be USD exposure. But if you as a stockpicker, find smaller domestic companies, which have their revenues and costs in a local currency (either naturally domestic or hedged to a domestic currency). You will have an implicit bet on that currency versus the USD.
The reason why I bring it up, is because two of my holdings that have performed the best, is such holding, Skandiabanken and Ramirent. It’s nothing I lie sleepless at night about, just something to keep in the back of your head before you fill your portfolio with such holdings.
A quick look at the portfolio performance and composition shows continued strong performance, both for my holdings and the benchmarks. Especially Hang Seng is on a tear lately, somewhat frustrating when I already have come quite far in rotating away in my Chinese holdings (and the ones I have left have not really moved). For example my two previous large positions in Ping An Insurance and YY has in the month after I sold surged 15% and 33% respectively. Whereas the stocks I bought in Europe have trades more or less sideways (Tokmanni being the exception), I have also been somewhat saved by the weakening USD in these holdings. Cash level is still high, as always I’m spending a lot of timing searching the markets for something investable. And as always lately struggling to find anything worth buying. In my Portfolio page I have made my Watchlist a bit longer (in reality it is much longer than this) but maybe those stocks can give you some investment ideas.
I will take one final slash sometime this year, to further reduce my China exposure (it will not go to zero as long as I find very interesting investment cases there). And according to my previous post about “where to hide”, I will try to move my portfolio one more step defensive (less cyclical) than it currently is.