Go Global, But Watch Your Currency Exposure

by on February 12, 2013 | ETFs Mentioned:

Bullish momentum has been an undeniable force on Wall Street since the new year, with equity markets reaching fresh highs and the overall economic landscape looking seemingly more optimistic. Martin Kremenstein, Director and Chief Investment Officer of Deutsche Bank Commodity Services, recently took time to discuss with us what he thinks will drive growth in 2013, highlighting some intriguing opportunities around the globe. In addition, he outlines several currency-hedged ETFs that may help investors get even more bang for their buck [see King Dollar ETFdb Portfolio]. 

ETF Database (ETFdb): What are some of the more compelling catalysts that you see driving global GDP growth in 2013? How about potential headwinds?

Martin Kremenstein (MK): There are three big questions that investors really need answered before they can feel comfortable with where the economy is going. First, can the U.S. government provide more guidance on where taxes and spending will be in the next few years? Continuing Washington gridlock and uncertainty on these two issues is not inspiring investor confidence and if the policy makers can come together and make a decision at least investors will know where they stand. Second, is Europe through the worst, or will it still be an uphill struggle? The economies over there are very fragile, but if they can start to consistently make steps forward the economic environment will be very conducive to growth.

The last question is with China, which has had a rough couple of years, but I think we are starting to see signs of recovery there as well. A resurgent China would be good for everyone, especially the commodity producing economies, such as Brazil, but also, Japan, Europe and, of course, the United States [Download 101 ETF Lessons Every Financial Advisor Should Learn].

ETFdb: Broadly speaking, which regions or countries outside of the United States do you see as potential “hot spots” in 2013 and why?

DBJP (U.S. Dollar-denominated) vs. EWJ (Japanese Yen-denominated)

MK: There is still a lot of interest in emerging markets, China being one of them. The challenges with China are that it’s really difficult for investors to gain access to the real China market; the China ETFs that exist use equities that are listed in Hong Kong or use ADRs, but it’s not particularly reflective of the Chinese market. The Japanese government’s intention to weaken the yen would be supportive of Japanese equities, but you do need to be mindful of the currency devaluation.

This is one of the main reasons we introduced our Japanese currency hedged product, DBJP, to enable investors to get exposure to Japan even in a yen devaluating scenario. Beyond that I think the United States doesn’t look too bad and even Europe looks moderately interesting right now. If an investor was looking for broad developed market exposure they may want to consider DBEF to get that exposure without the currency risk.

ETFdb: Given Deutsche Bank’s lineup of currency-hedged ETFs, in your opinion which foreign markets are most favorable for U.S. investors and why?

MK: Brazil is a compelling story, they would benefit greatly from growth in the United States and China, and again you would have to watch out for the currency, especially since the government there has been quite keen on devaluating the Brazilian real as well. DBBR offers investors the opportunity to take a position in the Brazilian equity market without worrying about the relationship of the real and dollar [see For ETF Investors, Currency Exposure Matters More Than You Might Think].

We have been at the end of an eleven-year downward spiral of the U.S. dollar, one of the longest continuous declines compared to all other currencies that we have ever seen. I think at a certain point this can’t go on forever and one of the trends that we might see in 2013 is the dollar strengthening. If we do see that then all investments would benefit from having a currency hedged element to them, and investors need to be aware of what currency fluctuations could do to their portfolios.

Bottom Line: While the investment landscape has a rather positive outlook in 2013, it is important for investors to realize how currency exposure can seriously impact bottom line returns. Investors looking to tap into some of the “hot spots” overseas ought to take a closer look at Deutsche Bank’s lineup of currency-hedged ETFs as they offer a compelling strategy with all the benefits associated with the ETF structure.

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Disclosure: No positions at time of writing.