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Global stock markets had been responding on the upside early this week amid global government bailout plans, but yesterday proved again that it's not all cream-colored ponies and crisp apple strudels out there.
For example, many previously strong emerging market currencies such as the Brazilian real, the Indian rupee, and the new Turkish lira have dropped substantially against the U.S. dollar. This has caused a few notable blow-ups at companies who had been hedging against a weak dollar, notably Brazil's Sadia (NYSE: SDA ) , Vale (NYSE: RIO ) , and Aracruz (NYSE: ARA ) , which booked derivative losses of $416 million, $313 million, and "undisclosed," respectively. And those reports don't take into account the most recent dollar appreciation.
Why's the dollar rising?
One theory behind the dollar's gains argues that investment banks, hedge funds, and mutual funds are liquidating their holdings in order to shore up balance sheets and prepare for investor withdrawals. As they do so, they sell their foreign assets denominated in emerging-market currencies and buy assets in U.S. dollars, euros, pounds, or yen. A second argument states that investors are fleeing markets that don't have government bank protections in place for those that do. Still another idea is that emerging-market currencies simply aren't reliable enough for long-term savings, and that investors -- having booked profits on a weakening dollar and seen the consequences in the mortgage market of mispricing risk -- are looking for the safety of developed markets.
Brazil, for example, has been an "emerging" economy for more than 25 years. This is not to say that it isn't a rewarding place to invest, but rather that its currency -- given the political, criminal, and structural risks in the country -- doesn't represent a better store of wealth for institutional and risk-averse investors than the U.S. dollar.
What do falling emerging-market currencies mean?
A falling currency has bad and good aspects. The bad news is that a dramatically weaker currency makes it much more expensive to import goods such as oil and fuel -- although the rapid decline in oil prices in recent weeks has eased this pressure a bit. Also, widespread declines in foreign direct investment in these countries will restrain infrastructure spending, which will reduce the capacity for GDP growth.
The good news for emerging countries is that their export industries are more competitive when their currencies are weaker. Reports that China's exports were up 21.5% year-over-year in September would seem to indicate that things aren't getting too bad too quickly. Of course, analysts were quick to couch this news with the specter of dramatic drops on the horizon.
You know times have changed when good news out of China is being viewed with a cautious eye.
We'll save the schadenfreude for others, but it seems German finance minister Peer Steinbruck wasn't just completely wrong in placing all the blame for the financial crisis on the United States. He was also unoriginal, as Brazilian President Luiz Inacio da Silva beat him to the (sucker) punch, telling a press gaggle nearly a week earlier to "Ask Bush [about the U.S. crisis]. This is his crisis, not mine." Finger-pointing aside, this has become a crisis that affects politicians, citizens, consumers, and investors worldwide.
Indeed, though we continue to tell our Motley Fool Global Gains members that the growth of the middle class in places such as Brazil and China is likely to be one of the most lucrative investment themes of the next quarter-century, the fact of the matter is that these countries are struggling to maintain growth today. An article in The Wall Street Journal this week reported that businesses and consumers alike in China are holding down spending, Brazilians aren't buying iPods, and Build-A-Bear Workshop (NYSE: BBW ) stores in India are shutting down. Canada's The Globe and Mail reported on slumping auto sales in China and substantially decreased demand for commodities.
Yet Apple (Nasdaq: AAPL ) , Build-A-Bear, and miners such as BHP Billiton (NYSE: BHP ) aren't even getting the worst of these slowdowns. Each has international diversification and some balance-sheet strength. You can only imagine what's happening to the mom-and-pop stores, along with other local or regional small businesses that are entirely dependent on these struggling economies.
So while we continue to believe in the consumption theme, we also continue to tell our members that they need to focus on the long term. Emerging markets are emerging for a reason: There will be significant hiccups along the way.
Regardless, we at Global Gains continue to think that it's a good strategy to get exposure to emerging markets such as Brazil, China, and Turkey in times of crisis. Each of these countries has significant macroeconomic tailwinds and long-term growth potential, and while you'd normally pay a hefty premium to own their high GDP growth rates, those premiums today have drastically narrowed.