mmm...Turkey

Seems everybody these days wants to invest internationally*. India? I'll take one ETF and a side of Tata. Mexico? Sure. China? I'll take one of everything! Do you have any Gazprom left?? You can be sure that the supermarket that is the world of ETFs, ADRs, and international mutual funds is always well-stocked.

After FXI and EEM made -10% and -6% corrections respectively last week I started seeing a blogosphere full of "throw the baby out with the bathwater" comments about China and emerging markets. Come on! Sure we're in for a bumpy ride, but I have to believe that over the long term these markets are going higher. How's that for an convincing argument :)

Today I read an article in WirschaftsWoche that reminded me of an often overlooked risk of investing abroad, currency risk. They had a great example which i'd like to cite here. It turns out that if a European-based investor bought the Dow 30 index on June 5th 2001 (Dow worth 13,154 Euros), the index today, after being translated back into Euros would be at 9,522 or -27.5 %. OUCH! In that time period the Dow has gained 18% but the Dollar fell 35%. Dollar Puts anyone??

Now back to my earlier argument, specifically China. While the weak dollar has been working against the rest of the worlds investors (and poor Americans living abroad like me), it's been great for American investors and companies alike and there doesn't seem to be an end in site. So we have a secularly depressed dollar and Yuan that has more upward than downward pressure. Everyone knows that China might act soon to cool its economy, but the impetus to revalue the Yuan upward might come from another more direct source. I would call it a Paulson-Induced-Controlled-Renmimbi-Revaluation effect, which in English means that Hank is going to lay the smack down on some Chinese central bankers if they don't do what he says. Whether the Chinese bow to threats from a little ole' Treasury Secretary is debatable, but pressure is now mounting on multiple fronts (both political and economical) which leads me to believe that the odds are in favor of a Yuan upward revaluation in the next 2 years. This all sounds like easy money to be made; too bad currency markets don't operate in a vacuum.

I'll post something lighter next time.

*inflows into global-equity exchange-traded funds as of November 2006 have increased 56% since December of 2005, to $102 billion. Source: www.ici.org