RSSUnwind Your Foreign?
By Roger Nusbaum | August 26, 2008 | 12:29 PM | 0 Comments
Earlier today on The Network they had a chap on (whom I seem to recall his being wrong a lot during this bear market) who suggested getting out of or reducing foreign equity exposure due in part to the recent rally in the dollar. Presumably he thinks this trend will continue.
The call may or may not be right but it raises several dilemmas for investors. The issues include commission dollars spent, taxes (depending on the account type), where to invest the proceeds and the risk that the dollar rally is a short term snapback in a downtrend.
As part of my healthcare allocation I own two mega cap pharma companies, one of which is Novartis (NYSE: NVS) which of course is a Swiss company. Right or wrong, I think NVS along with the other name is the best way to access that part of the sector.
If you have selected a foreign stock for some part of your portfolio chances are you think it is the best way to capture whatever segment it covers. How likely is it that your entire thesis, assuming you are a longer term investor, is null and void based on a dollar rally? In some instances sure but if you are buying a country for diversification and you think that stock is a good proxy for the sector and the country you want to access it is very unlikely that a dollar rally changes that.
For anyone that is actually sweating the dollar rally versus their foreign holdings it might make more sense to hedge the exposure with PowerShares DB Dollar Index Bullish ETF (NYSE: UUP) than unwind foreign exposure. It obviously will not be a perfect hedge but there is only one trade to make which is far less disruptive for the long term goal you probably have.
The other aspect of this of course is just what really is going on with the dollar? The US' deficits are big and getting bigger, the financial crisis has become global but seems to be concentrated here, there has been an asset deflation in the US while certain prices have gone up a lot.
The dollar could certainly continue to go up but looking out over a couple of years in the context of what to do with foreign stocks, what do you really think the dollar is going to do?
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