Money is flowing to the riskier assets once again.
How do I know?
Emerging-market bond funds had their best three weeks on record this month as they took in more than $5 billion. Emerging market equities took in $4.86 billion during the same period.
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So as money is flowing out of Greece, Portugal and Spain due to credit rating cuts from Standard & Poor’s. That money has to go somewhere. In fact, money has flowed out of European equity funds for the 12th week in a row.
Therefore we know that money is flowing away from Europe and into the emerging markets … into their stocks and bonds.
Now, the first step in buying a foreign asset is that you have to sell your own currency and purchase the currency of the country that you want to do business in.
After all, if you’ve invested in Europe and you see all of these downgrades and you want to escape that and move into greener pastures, then you have to sell the euro and buy the currency of the country that you want to invest in (no matter if you want to go into their stocks or bonds, or even their real estate).
That’s why I love investing in currencies. It’s the “gateway” to these investments. You first have to pass through its gate in order to get into these other financial instruments in those countries.
So I don’t have to guess whether investors are buying their bonds, stocks or real estate. I just have to know that before they invest in ANY of those instruments, they have to buy their currency first.
That’s why I’m bullish emerging market currencies right now. Specifically, I’m talking about the Singapore dollar, Mexican peso and Turkish lira.
As investors to further out on the limb again and buy into emerging markets, these currencies will benefit even before the stocks, bonds or real estate in those regions do since you have to pass through the door of their currency before entering into any of these other instruments.
So if you want a macro way to play an economy and you don’t know whether to get into their stocks, bonds or real estate, first invest in the currency of that country.
After all, it’s a very broad way to invest in that economy in the first place.
About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here
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