Dead Presidents Seek Work Abroad

11/04/2010 2:31 pm EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

The world’s on high alert for suspect cargo. From Beijing to Brasilia, from Sydney to Toronto, and in many ports in between, they’re bracing for the theoretically inexhaustible inflows of US dollars.

The Federal Reserve’s decision to manufacture and invest an extra $600 billion by June had more greenbacks washing up on foreign shores throughout October, before the printing/shopping spree had even begun. Commodities and emerging markets were the main beneficiaries. Many boast growth rates and currency yields far in excess of those available in the US. No wonder so many dollars are defecting.

According to MSCI Barra, Peru was the top-performing emerging market last month, advancing 17%, thanks to its gold and copper riches. Argentina’s grain wealth and the sudden death of an ex-president with anti-business leanings delivered a comparable windfall. Colombia (oil and coffee), Mexico (oil), Russia (oil), Nigeria (oil), and Kenya (coffee) also outperformed, gushing 6% to 7% higher.

There’s more going on here than a mere resource grab or a search for alternatives to the dollar. The Shanghai Composite index soared 12% during the three weeks it was open for business in October. China, of course, is a major commodity importer. Despite the rising cost of raw materials and many foodstuffs, the optimism in Shanghai was ratified by an unexpected jump in China’s (and India’s) manufacturing surveys. Growth in domestic consumption has been picking up the slack from exports.

On the other hand, manufacturing surveys in South Korea, Taiwan, and Japan faded, their exporters hampered by appreciating currencies. The South Korean won has gained 40% against the dollar since March 2009, and nearly as much against the Chinese yuan.

In contrast, Hong Kong has maintained its US dollar peg, and has now joined Shanghai in the vanguard of the equity rally. After rising 3.3% in October, the Hang Seng tacked on another 4.5% during this week’s first three trading sessions. Goldman Sachs is calling for a further 20% gain over the next year, as money from the slower developed markets flows in.

The pickings have grown slimmer of late in Europe, after a balmy October that saw stocks in Portugal and Greece fare even better than Germany’s. Blame Berlin. The German government has pushed austerity as the solution to the world’s economic problems, and has loudly complained about the asset purchases being ramped up by the central banks of US and Japan.

The German government, trailing notably in the polls, has taken a tough stance in talks on European bond guarantees to replace the extraordinary ones enacted earlier this year, which expire in three years. Germany thinks bondholders should take haircuts much as they would in a default, in the event an EU government needs a bailout. Holders of Greek, Irish, and Portuguese debt are wondering if they should get out of the barber’s chair, and why the waiting room has emptied so fast.

So far, austerity on the home front may not be working out quite as well as hoped. German consumers are not shopping much. Their malaise is increasingly shared by the rest of the continent.

In the UK, a professional group has estimated that the government’s austerity regime will cost 1.6 million jobs—or one of every 19 around today—over the next five years. The UK service sector looked softer than the uptick in headline number might suggest, with looming public cuts compounding the private sector’s uncertainty.

Fortunately for the UK, it has lots of companies like Fenner (London: FENR), the maker of conveyer belts favored by John Snowden. The company has little exposure to its home market, relying overwhelmingly on exports. It’s only the latest story of a company that got lean and now has earnings leverage as orders from mining customers pick up. Shares are up 33% in little more than two months, yet still look set to yield some 3% in dividends.

Of course, Roger Conrad’s pick, Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF), makes that seem puny with a trailing payout above 20%. Even if the Canadian paper processor doesn’t sustain quite that rate in the future, it should still stack up very well to the alternatives.

As the Canadian dollar nears parity with the greenback (the Aussie dollar crossed that threshold Wednesday), the Coffin brothers see no bubble in metals. The analysts do think the red-hot junior miners are due for a break. And with all those dollars seeking hidey holes, they’d better hurry.

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