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Why You Should Give a Hoot About Global Currencies

Written by Nicholas Vardy, CFA.

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The relevance of global currency movements is tough for most American investors to get their heads around.

Looking to make the difficult and remote even more philosophically complex, currency speculator extraordinaire George Soros once opined that investing in currencies is an "existential choice."

Now before you reach your well-thumbed copy of existential philosopher Jean-Paul Sartre's "Being and Nothingness," understand that Soros's point has nothing to do with the thinking of this Gauloises cigarette-smoking, womanizing French rake.

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Jean-Paul Sartre: "Me, long the U.S. Dollar? Never!"

Soros' point is that no matter what you invest in, you are always also betting on a currency — whether you know it or not.

So when you buy a share of Facebook (FB), this U.S.-dollar denominated stock carries U.S. dollar risk with it. You just don't think about it because the U.S. government does not have a history of announcing an overnight currency devaluation — as governments elsewhere in the world have done in the past.

Throw in the fact that Facebook gets a growing percentage of its revenues from overseas in non-dollar denominated currencies, and you start to see why currencies matter. And that's even if you are comfortably ensconced far afield on the beach in Naples, Florida.

Enter The "Big Mac" Index

Britain's Economist magazine has just updated its measure of global currencies — the "Big Mac Index."

The "Big Mac Index" has provided a tongue-in-cheek but surprisingly useful way of measuring purchasing power parity (PPP) since 1986 — that is, the relative over- and undervaluation of the world's currencies compared to the U.S. dollar.

The Big Mac Index is useful tool for assessing the relative over- and undervaluation of the U.S. dollar — according to the textbook measures of "purchasing power parity."

According to the theory of purchasing power parity, a U.S. dollar should buy the same amount of the same good across all countries.

The "Big Mac" Index compares the cost of Big Macs — an identical item sold in about 120 countries — and calculates the exchange rate (the Big Mac PPP) that would result in hamburgers costing the same in the United States as they do abroad.

Once you compare the Big Mac PPP to the market exchange rates, you see which currencies are under- or overvalued.

I like to think of purchasing power parity as the "fundamentals" of a currency.

But as with stock prices, exchange rates can often diverge substantially from their fundamentals.

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Are You Crazy to Invest in Russia?

Written by Nicholas Vardy, CFA.

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"Are you crazy...?"

That was the reaction I got from a London investor I spoke with at a recent summer drinks party.

I had made the mistake of revealing that I thought it was a good time to start looking at investing in the Russian stock market.

His reaction was understandable.

After all, everyone knows that Russia — both politically and economically — is going to hell in a hand basket.

And with new U.S. and European Union sanctions inevitable after last week's tragic downing of a Malaysian airliner over Ukraine, only a fool and a knave would risk his money investing in Russia.

Frankly, I'd heard it all before.

And his reaction merely reinforced my decision.

I actually left that summer party early, to make just such a recommendation in a very public way on the "After the Bell" segment on Fox Business last Friday.

Are You Crazy?

"Are you crazy?" is a reaction I often hear when I speak about Russia.

After its collapse in 1998, everyone from Warren Buffett, George Soros and Jim Rogers concurred with one investor's sentiment that "I would rather eat nuclear waste than invest in Russia." (Ironically, Rogers has since changed his mind — and has been a big buyer of Russia since it annexed Crimea.)

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Double-Digit Percentage Gains on the ‘Final Frontier’

Written by Nicholas Vardy, CFA.

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I've written before about how a boom in emerging market stocks is not a question of "if" but "when." Catch a boom in an emerging market — India is a solid candidate for 2014 — and you can easily double or triple the returns you get from just sticking with mainstream U.S. stocks.

There is, however, a way to boost your returns even more by investing in so-called "frontier markets" — developing markets that are even smaller and more illiquid than their emerging market cousins.

Surprisingly, frontier markets may also offer the better long-term investment opportunity.

Certainly, it has been that way over the past few years.

Yesterday, the MSCI Frontier Index closed at a record high, and it is up 18.22% in 2014.

That has far outpaced the MSCI Emerging Markets Index's return of 9.07%, as well as the S&P 500's return of 7.98%.

This strong performance continues a recent trend. The MSCI Frontier 100 Index was up 25.9% in 2013, outperforming the MSCI Emerging Markets Index by 28.5%.

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Frontier Markets vs. Emerging Markets

Frontier Markets: The Investment Case

Strong economic growth, diversification and superior returns with lower volatility combine to make frontier markets a very attractive investment.

Invest in a successful market at the start of its emergence — as investing legend John Templeton did with both Japan and Germany after the Second World War — and you have the formula to generate big and lasting returns for many years to come.

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What are the Top Five Global Stock Markets of 2014?

Written by Nicholas Vardy, CFA.

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With the first half of 2014 behind us, it's worth taking a looking at the top-performing global stock markets of 2014.

Over the past few years, U.S. investors have enjoyed the "exorbitant privilege" of investing in a stock market that ranked #1 in 2011 and #5 in 2013 among all its global rivals.

And you can't blame most investors for thinking:

"Why invest in far-off global stock markets when I can do better sticking close to home?"

However, 2014 is turning out differently.

Despite the U.S. market hitting record highs, it ranks a mere #26 among the 46 global stock markets I follow on a daily basis at my firm Global Guru Capital.

Note that these are all stock markets you can actually invest in through exchange-traded funds (ETFs).

Why is this important?

The fact that Ukraine's stock exchange is up 45.40% this year does you little good if you can't invest in it.

With that, here are 2014's top five global stock markets that you can invest in at the click of a mouse.

1. WisdomTree India Earnings (EPI) — up 34.05%

Arthur Koestler's 1960 classic book, "The Lotus and the Robot," unflatteringly described his experience of arriving in Bombay (Mumbai) as "the sensation that a wet, smelly diaper was being wrapped around my head by some abominable joker."

Global investor Jim Rogers refuses to invest a dime into India, saying it's "a wonderful country, but a terrible investment."

Yet, India is becoming the global investment story of 2014, and its recent rise has propelled India into the ranks of the 10 largest global stock markets in the world.

The key behind India's recent strong run is the election of Narendra Modi as India's next prime minister. Hailed as the Ronald Reagan of India, Modi's mantra has always been "less government, more governance." India is already expected to unveil bold reforms in its budget this week in a bid to turn around an economy, whose growth has lagged China's over the past five years.

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EPI vs. the S&P 500

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GLOBAL GURU CAPITAL – MONTHLY UPDATE

Written by Nicholas Vardy, CFA.

Portfolio Update

GLOBAL GURU CAPITAL – MONTHLY UPDATE

June 2014

The "Ivy Plus" Investment Program gained 2.32% for the month.
The "Global Gains" Investment Program rose 0.31% for the month.
The "Double Your Dividends" Investment Program added 2.01% for the month.
The "American Alpha" Investment Program gained 3.08% for the month.
The “Masters of the Universe” Investment Program increased 2.93% for the month.

THE "IVY PLUS" INVESTMENT PROGRAM
ALL ASSET CLASSES IN THE BLACK

The "Ivy Plus" Investment Program gained 2.32% for the month. The program is up 5.44% year-to-date, through June 30.

The Ivy Plus investment program had an outstanding month despite the seasonal weakness of the summer months come into focus. Every Ivy Plus position gained last month, bringing every position to a positive gain for 2014.

Business Development Companies (BDCs) have been a weak spot in the portfolio this year. However, this changed last month, as BDC’s were the big June gainers, jumping 5.50%. US Small Caps also experienced a similar move, adding 4.97%, as they began catching up to other U. S.-based investments.

The most marked June change appeared in the Hedge Fund classification of the portfolio. The four positions that make up this class have generally lagged the broader markets all year. However, June finally ushered in a sea change as all positions posted gains for the month, and all moved to a positive gain for the year.

Real Estate and U.S-based holdings continue to be the strongest gainers year-to-date across the entire portfolio.

The “Ivy Plus” investment program positions performed as follows:

 

Monthly Gain

YTD Gain

Equities

 

 

 

 

 

US Large Cap

2.62%

7.00%

US Mid Cap

2.99%

7.89%

US Small Cap

4.97%

6.53%

Developed Large Cap

1.04%

4.51%

Developed Small Cap

1.71%

4.96%

Emerging Markets

3.17%

6.14%

Emerging Markets Small Cap

1.86%

5.30%

Emerging Markets – Low Volatility

1.99%

4.33%

Private Equity

2.99%

3.27%

Business Development Companies (BDCs)

5.50%

1.82%

S&P 500 Equal Weight

2.86%

8.47%

S&P 500 Dividend Payers

1.44%

5.29%

Initial Public Offerings (IPOs)

4.00%

6.47%

Corporate Spin-offs

2.30%

2.82%

 

 

 

Fixed Income

 

 

 

 

 

US Treasuries

0.08%

3.84%

Foreign Bonds

1.60%

5.86%

Inflation Protected

0.37%

5.81%

High Yield Bonds

1.65%

6.66%

 

 

 

Real Assets

 

 

 

 

 

US Real Estate

1.13%

17.76%

International Real Estate

0.93%

7.21%

Commodities

2.11%

3.59%

Timber

2.45%

1.16%

Agriculture

0.95%

4.77%

 

 

 

Hedge Funds

 

 

 

 

 

Global Macro

0.79%

2.59%

Hedge Fund Long/Short

4.37%

4.14%

Managed Futures

1.68%

0.67%

Hedge Fund Managers

3.89%

3.28%

@NickVardy