No Time to Be a Hero

06/29/2010 3:18 pm EST

Focus: ETFS

Nicholas Vardy

Editor, Oxford Wealth Accelerator

Nicholas Vardy, editor of Global Stock Investor, favors the dollar and the yen as safe-haven alternatives to the sagging equity markets.

With negative news dominating the headlines, this is a challenging time to make a bullish case for global stocks. The MSCI Emerging Markets Index (NYSE: EEM) now is trading below its 200-day moving average. Global markets are lower than they were after the selloff in January and are trading at their lowest levels since September 2009.  With the euro zone’s economy growing an anemic 0.5% in Q1—and Europe’s fiscal challenges daunting—there is an increasing chance that the euro will fall to parity with the US dollar.

Look beyond the doom-and-gloom headlines, though, and the prospects for the global economy remain strong. Both the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD) recently raised their growth forecasts for 2010. The OECD expects the economies of its 30 members to grow 2.7% this year, more than the 1.9% predicted in November. Including non-members such as China, it expects the global economy to expand by 4.6% this year and 4.5% in 2011.

On the investment side, Morgan Stanley is calling for investors to overweight emerging markets equities. Strong earnings results have led to rapidly increasing 2010 earnings-per-share growth forecasts for 2010. Forward price-to- earnings (PE) ratios have fallen to about 11 times analysts’ profit estimates for this year—the lowest level since March 2009.

While I would love to embrace Morgan Stanley’s optimism, I am much more cautious as a result of the recent selloff in equities. No analyst has ever successfully shoehorned the concept of “financial contagion” into economic forecasting models. And with bad news coming from all directions, it is best to stay defensive and to keep your investment powder dry. With investment opportunities in global stock markets few and far between, this month’s [issue] is dedicated to analyzing opportunities in global currency markets. You may recall that shifting our attention away from global stocks allowed us to avoid the meltdown in global stock markets during the fall of 2008—and to make money over that turbulent period.

[I had previously recommended] a bet against the euro through the UltraShort Euro ProShares ETF (NYSE: EUO) and a bet on the Chinese yuan through the WisdomTree Dreyfus Chinese Yuan ETF (NYSE: CYB).

This month, take an additional currency position by buying the US dollar through the PowerShares DB US Dollar Index Bullish ETF (NYSE: UUP). Set your stop at $23.75.

And although its fundamentals are far from outstanding, the Japanese yen also serves as a safe haven during times of global turmoil. So buy the CurrencyShares Japanese Yen Trust ETF (NYSE: FXY), and set your stop at $102.00.

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