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Rate cut consequences
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Ken Kam has initiated a discussion on portfolio consequences of the Fed rate cut and the consequent dollar weakness. My own take is that the dollar had a lot of pressure to fall due to trade and budget deficits that are long term problems and that the rate cut was the proximal trigger that catalyzed the adjustment process. See for example, international trade specialist Paul Krugman's analysis of the situation. If this is true then the situation will take a long time to resolve. I think this implies favoring stocks of non-US companies. While many investors think of holding just US stocks as a conservative strategy, I think it that, on the contrary, it is a very risky position to be in since it is essentially equivalent to betting 100% of one's portfolio on a single currency (USD)! In particular, I like the prospects of blue chip Indian companies ICICI Bank (see my previous post) and Sterlite. The Indian Rupee has appreciated 11% last year (one of the strongest movers against the USD) and these two companies will benefit from the heavy investment in infrastructure that is needed by a rapidly emerging economy. The relative fraction of assets allocated to India (and China) in the MSCI World Index is still a small fraction of the ratio of its GDPs to world GDP (using exchange rates and even more so when using PPP numbers) so, despite the huge gains in the Indian (and Chinese) market over the last few years, I feel that the world portfolio allocations are still underinvested in India (and China). I also think that the housing market has a long way to fall. According to the Standard & Poor's/Case-Shiller US National Home Price Index, US home prices increased 86% in real, inflation-corrected, terms from 1996 to 2006, but have since fallen 6.5% - and the rate of decrease has been accelerating. This index was created by economist Robert Shiller who specializes in bubbles; he sees housing as a global bubble which has just started to correct with a long way to go. I have placed my bet on this unwinding by buying SRS. This represents a contrarian take on the rate cut in the sense that I think that the cut provides a transient boost to real estate related stocks which, in turn, presents a buying opportunity in SRS due to the false belief that housing has already bottomed. | ||
