Maximizing Investment Theses

Below is an excerpt from an interesting essay called Basic Points by Donald Coxe, the Global Portfolio Strategist for BMO Financial Group. Donald is also the Chairman and Chief Strategist of Harris Investment Management in Chicago, and Chairman of Jones Heward Investments in Toronto. An interesting guy, to say the least. What I found of particular interest was his discussion of the impact that currencies have on wealth & value, and investment returns.
For Americans, the bear market is over. For Europeans, Canadians, Australians, New Zealanders and South Africans, the bear market grinds on. If we are right in our forecast that the Canadian dollar will reach par on the greenback by mid-2006, a Canadian holding an S&P Index Fund will need double-digit returns on the Index to earn what would be earned in a Canadian chequing account.

Global statistics on per capita GDP and per capita wealth tell us about incomes and net financial assets--but they are heavily skewed by the changing dollar values of local currencies. When the dollar went on a tear nine years ago, Americans' share of world wealth grew dramatically: Americans who kept all their savings on deposit with an American bank gained hugely in wealth compared with European and Canadian counterparts of equal wealth and savings who kept them in their own currencies with their own banks. The Americans' globally-adjusted wealth gains, just from cash, were so strong that they delivered comparable returns with foreigners who had balanced portfolios. Rarely was it so easy to achieve such huge investment out performance without assuming substantial volatility risk.

Based on the evidence of returns on financial assets from 1995 through January 2002, the stronger one's currency the better. "Sound as the dollar" was the mantra, as the world poured its savings into the US, the progenitor of the magic money machine, the New Economy, and the world's sole hegemon now that peace had broken out-- seemingly forever.

But a desirable level for a currency is not measured solely in terms of wealth. It is also measured in terms of the transactions of competitive economic activity. "Sound as the dollar" was the death knell for millions of American manufacturing jobs during that same time span. A company whose costs accumulate in the world's most expensive currency is at a punishing disadvantage in competition with competitors based almost anywhere else. In terms of global trade, a weak currency is a consummation devoutly to be wished. The currency lord giveth (in measurement of the value of people's savings) and the currency lord taketh away (in terms of employment income, and the value of employer pension plans).

In terms of mergers and acquisitions, changes in currency values produce a Pirandello-style role switch for acquirers and acquirees. During the 1990s, US multinationals were able to buy European and Canadian companies, using their valuable cash and their valuable stock to buy companies whose stock was denominated in a weak currency.

The game has changed. With the euro up from its low against the dollar by 60%, even if the relative share prices of an American would be acquirer and the Eurozone potential acquiree had remained in the same quoted relationship to each other, buying that Eurocompany would now cost the US company 60% more. Consider, for example Manulife's purchase of John Hancock: if the loonie had done what many prominent Canadians were predicting--fall to $0.50, Hancock would have been too costly for Manulife to buy. At some point in the loonie's plunge, the roles would have been reversed.

Another way currency changes can affect corporate power comparisons comes from the denomination of corporate debt. Consider two Canadian companies with roughly equal stockholders' equity as of early 2003. Each has substantial debt. One company has nearly all its debt in loonies, the other's is greenback-denominated. The second company's enterprise value rises sharply compared to the first company.

I'm not an Economist by any stretch of the imagination, but I do believe that this sort of issue is going to become more & more important to both individual investors and competitive venture investors during the next years. Globlisation, and the Internet, is making our world smaller and making capital more liquid -- free to flow wherever it might. Investment strategies & technology thesis must start take in to account the global marketplace and international competitive factors much more than they once did...

Another insightful excerpt from the read came from the Investment Recommendations section:
- all other things being equal, avoid investing in companies who produce what China produces;
- all other things being equal, invest in companies who produce what China needs to buy.

That seems simple enough.
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