The Upside of Currency Troubles

05/03/2011 9:00 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

The euro’s crisis has kept it cheap and been a boon to some European manufacturers. Your portfolio should have exposure to select European export stocks, like Germany’s Siemens and Aixtron.

The sovereign debt crisis in Greece, Ireland, Portugal, and maybe Spain depresses the euro every time it moves back into the headlines.

It's true that the European currency has been on a bit of a tear lately against the US dollar, finishing last week at $1.4866. That was the highest level since December 2009, now that the European Central Bank has started to raise interest rates ahead of the US Federal Reserve.

But not so long ago, on January 11, the euro traded for just $1.2904. That was almost 13% below the December 2009 price.

Yep, the European debt crisis has dealt the EU’s currency its share of whacks.

But the troubles of the euro—because of the continuing budget crises in Greece, Portugal, and Ireland, apprehension over restructuring or default in any of those countries, and fears that the crisis could spread to a bigger economy such as Spain or Italy—are only half of the story. The negative half.

The other side of the story is how euro troubles have given a huge edge to the exports of the fiscally sounder euro economies of northern Europe, such as Germany, Finland, and the Netherlands.

Because these countries use the euro—instead of, say, the old German Deutschmark—their exporting companies have escaped being savaged by a rapidly appreciating currency, the way Brazil's exporters have seen.

The troubles of the euro, which have kept the export currency cheaper than the strength of these economies would otherwise require, has been a boon to German makers of automotive controls, network communications gear, and medical equipment; Dutch makers of semiconductor manufacturing equipment; and Finnish makers of elevators and escalators.

And this other side of the euro crisis means that your portfolio should have more exposure to these European export stocks than it would if all you did was pay attention to the problems of the euro.

NEXT: Northern European Exporters Benefit

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Northern European Exporters Benefit
Let me explain how this other side of the euro "problem" works to the benefit of northern Europe’s euro exporters. And then I'll give you a few stocks to add to your portfolio to take advantage of this weak euro.

Think of where the euro might be today if it weren't for the sovereign debt crisis. The euro is up against the dollar over the last six months—by 6.1%, from November 3, 2010 to April 29.

But for that period, just about every currency in the world is up versus the US dollar. The Brazilian real, for example, is up 8.7% during that period. That works out to 42% greater appreciation for the real than for the euro.

And think of where a Deutschmark might be. Compare that now-imaginary currency with the real (the Brazilian real, that is). Let’s start with Brazil:
               

  • The country’s economy is fighting off inflation that threatens to end the year at 6% to 6.5%.
  • The financial markets don't totally trust the promises of the government of President Dilma Rousseff to cut spending.
  • The Brazilian economy is slowing—probably to something like 4.5% GDP growth, from 7.5% in 2010.
  • The central bank seems to be getting cold feet about fighting inflation with big interest-rate increases.

By contrast, in Germany:

  • Companies are hiring as they increase production to meet a boom in exports.
  • The German economy is forecast to grow by 2.6% in 2011, after growing by 3.6%, a record, in 2010.
  • German unemployment fell to 6.3% in February, well below the 9.9% average for the 17 countries that use the euro.
  • German inflation did indeed accelerate to 2.6% in April, from 2.3% in March, but that was still one of the lowest inflation rates in the world.
  • Nonetheless, the European Central Bank raised interest rates this month, with another rate increase on the way in June or July.

It's hard to say what kind of appreciation the Deutschmark would have seen under the same circumstances: tough central bank, rising interest rates, nearly record growth, low inflation (by global standards), and a nearly balanced government budget.

Certainly, such a Deutschmark would have equaled the appreciation of the Australian dollar—up 16.4% in the year that ended April 28.

That would have meant communications gear from Siemens (SI), or semiconductor equipment from Aixtron (AIXG), would have been 16.4% more expensive this year than last.

That's a tough price increase to pass along to customers when so many companies are looking to make a deal—and when all your toughest competitors from China have the advantage of a controlled currency that China's government is keeping artificially cheap.

If you want, you can think of the euro debt crisis as a huge currency subsidy to German exporters.

It's not just German exporters that benefit, of course. The same currency subsidy works to the advantage of exporters in any country using a cheap euro instead of what would be a much more expensive national currency.

I think this description fits Finland, Belgium, and the Netherlands pretty well at the moment. (If you haven't been paying attention to Belgium, you should. The country's economy is chugging along, even though the country is effectively without a government. Makes me wonder...)

NEXT: Currency-Subsidy Stocks to By

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Currency-Subsidy Stocks to Buy
Finding stocks that profit along with this currency mismatch isn't as easy as I would like it to be.

In Germany, many of the best exporters belong to what's called the Mittelstand, those small and mid-sized companies that still form the backbone of the German economy. Many of these are still either private or family-controlled. Others have never seen a need to raise capital outside Germany and don't trade in the United States.

A good example is Kuka, a designer and builder of factories—especially automobile factories—that can provide everything from welding systems to robots. The stock trades in Germany as KU2 (and very well, too, with the shares up 62% in a year), but not in the United States.

I do have two German exporters to recommend: Siemens and Aixtron. And I'm looking for more. (Aixtron is a member of my Jubak's Picks portfolio. I added it to the portfolio on November 16, 2010, and the shares are up 33% since then.)

I've also got a Dutch exporter that trades in New York that I'd recommend in the Picks portfolio. ASML Holding (ASML), an exporter of semiconductor-making equipment, has been in the portfolio since April 20, 2010. The shares are up 16.4% in that time.

Finally, I've got one Finnish stock to recommend to you, too: Kone Oyj (Helsinki: KNEBV.FH). The stock, unfortunately, doesn't trade in the United States.

This exporter (and servicer) of elevators, escalators, and automatic building doors has built solid revenues from selling in China. The company looks like it is making a successful transition from selling to developers in China's biggest cities, to adding developers in China's smaller and more interior cities. That's important, since those cities are the next stage in China's building boom.

One thing to remember in your search for more plays like these—and it does make the search harder—is that you need to rule out companies that export things, such as fertilizers or natural gas, that are priced in dollars. That removes a good part of the currency advantage from the euro crisis.

Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX ), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Aixtron, ASML Holding and Kuka as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.

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