US Investors Must Hedge Currency Exposure

Saying entire countries are trying to stimulate demand by devaluing their currencies, global macro investor Richard Bernstein argued that U.S. investors must absolutely hedge currency exposure wherever they can.

And, in case investors missed it, South Korea is the next frontier of the currency-hedging craze, he said.

“Currency is the most important issue,” Bernstein told the audience today at ETF.com’s second annual Global Macro conference in New York.

“The global credit bubble left the world awash in productive capacity, and if you’re a country, you have to be like Walmart,” he added, saying being like Walmart amounts to weakening one’s currency.

US ‘Secular Winner’

Relatively speaking, the U.S. is the “secular winner” because the world’s biggest economy has been leading the global economy out of the financial crisis. That, in turn makes currency hedging imperative for U.S. investors who are dealing with clear dollar strength for the first time in 15 years.

The chart below showing yen, via the CurrencyShares Japanese Yen Trust (FXY | B-99), and euro weakness, via the CurrencyShares Euro (FXE | B-98), against the dollar makes the relatively new trend crystal clear.

Chart courtesy of StockCharts.com

Bernstein said Japan, Europe and, as noted, South Korea, are clear winners in this currency devaluation trend, essentially because prevailing inflationary pressures in each of those three economies enables their respective central bankers to pursue low-interest-rate policies.

More Currency Debasement Coming

That has made currency-hedged ETFs like the WisdomTree Europe Hedged Equity Fund (HEDJ |B-46) and the WisdomTree Japan Hedged Equity Fund (DXJ | B-68) huge hits in the past few years. These two ETFs peel out the weakness of the yen and the dollar depicted above.

The next big wave of currency weakening that investors are only starting to tune in to is South Korea. It has begun, to be sure, but more has to follow, Bernstein said.

“They have no choice: They have to depreciate the won,” Bernstein told the audience, referring to central bankers in South Korea.

ETF investors have a number of currency-hedged strategies available to them that are focused on the home of global brands like Samsung and Hyundai, such as the Deutsche X-trackers MSCI South Korea Hedged Equity ETF (DBKO | C-55) and the WisdomTree Korea Hedged Equity Fund (DXKW).

… And Losers

Conversely, Bernstein said China and India are poorly positioned to thrive in a world of currency depreciation.

Firstly, the peg of China’s currency—the yuan—to the dollar, strictly limits China’s ability to weaken the yuan precisely because of the dollar’s relative strength in currency markets.

For its part, India is grappling with a prevailing inflation rate ranging from 5 to 6 percent. Cutting benchmark borrowing rates would make inflation worse.

Thus, India really ought to raise interest rates to strike down inflationary pressures. But it can’t do that either, because that would make its products and services more expensive in global markets, Bernstein said.