Jubak's Journal
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• 5 little-guy oil sector winners, 11/24/2004
• Set yourself up for a stellar 2005, 11/23/2004
• Do the right thing, Mr. Buffett, 11/19/2004
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Invest overseas for double the payoff
U.S. investors willing to try new tricks can reap bigger rewards in 2005. Thats because foreign investments offer a rare 'twofer' that will pay in two ways.
By Jim Jubak
Everybody likes twofers. Two cans of peas for the price of one. Two suits for the price of one. Two tickets to London for the price of one.
Ive never seen a twofer offering investors two shares for the price of one. But every once in a while, I do come across another kind of investing twofer, and I think Ive found one right now, thanks to the falling U.S. dollar.
If you buy the right kind of overseas income investments (stocks, bonds or mutual funds), I think you stand a good chance of:- Earning a higher yield than you get on comparable U.S. assets, and
- Seeing greater price appreciation than in the U.S. markets, as declines in the U.S. dollar translate into higher prices in euros, yen or Australian dollars.
Oh, and by the way, this twofer comes with less risk than youd get from a portfolio limited to just U.S. stocks and bonds. Thats always valuable, of course, but it will be especially valuable in 2005, a year that, if Im right, will deliver about the same 8% total return in stocks that investors have seen in 2004, and with the same kind of maddening sector rotations, head-fakes, aborted rallies and short-lived but stomach-wrenching scares. (For more on my take on 2005, see my last column, Set yourself up for a stellar 2005).
And, of course, this twofer offers the prospect of profits even if my read on 2005 is wrong. (Always good to plan for that possibility.)
Try something new
This twofer is available to every investor who is willing to learn some new tricks. Youll have to give up your unthinking reliance on U.S. Treasury bonds and U.S. blue chip stocks for safety and replace those assets with some relatively unfamiliar (and dare I say, "foreign") assets.
I dont underestimate for a moment how hard it is to get comfortable with a new stock or an unfamiliar asset class. But I think 2005 looks like a year that will reward stretching your mind and learning a new trick or two.
If Id known then what I know now it would have been so simple to beat, no make that to clobber, the U.S. stock indexes in 2004. If youd put your money into the American Century International Bond Fund (BEGBX) at the beginning of 2004, youd be looking at a total return of 9% right now. Thats almost 50% better than the total return on the Standard & Poors 500 Index ($INX). If, on Jan. 2, 2004, youd bought shares of Australia and New Zealand Bank (ANZ, news, msgs), youd be looking at a 21% year-to-date total return.
Lets not forget the twofer in investments like these, either. Even if the market prices of these assets hadnt appreciated at all, you would be collecting a 7.19% yield from the American Century International bond fund. The dividend yield on the Australian bank, at 5.2%, isnt far behind.
Unfortunately, we cant yell Do overs! and go back to January 2004. The task for investors is to figure out the logic behind this performance and then apply it to the present and the future.
A 3-part story
Part one of the story is the decline of the U.S. dollar versus currencies such as the euro. As of Nov. 22, the dollar is down 3.6% in 2004 against the euro and 4% against the Australian dollar. That means that euro-bonds or Aussie stocks are worth 3.6% and 4% more, respectively, when they are translated back into dollars for U.S. investors.
Part two of the story is about the relative interest rates in the United States and in specific foreign countries. In the United States, short-term interest rates have climbed in 2004, as the Federal Reserve has so far raised the fed funds rate to 2%, from 1% before the first rate hike in June 2004. In contrast, the Reserve Bank of Australia has kept its interest rate steady at 5.25% since its last rate increase in December 2003. The European Central Banks short-term interest rate now stands at 2%, but expectations -- which do more to set market rates than central bank announcements -- in 2004 have gone from a belief that the inflation fighters in Europe were about to raise rates to speculation that they would cut rates to keep economic growth from falling in the face of export competition from U.S. goods made cheaper by the falling dollar. That kind of differential between actual interest rates and expectations also has added to the price appreciation of euro and Australian dollar financial assets.
Part three of the story is purely and simply economic growth. The extraordinary returns from the Australian bank stock mirror the boom in the Australian economy driven by demand for raw materials from China. The economy (gross domestic product) is projected to grow by 3.6% this year, and thats meant lots of demand for loans from businesses seeking to expand and from consumers looking to spend.
But 2005 wont be a simple replay of 2004. For example....
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