I think this heading will definitely raise some eyebrows this morning, but I’ve got tell you how I feel just the same.
U.S. large-cap stocks are probably one of the best bargains in the world today and not just for local currency investors in the United States. For European investors, including British sterling-based and Canadian dollar-based investors, American multinationals are literally one of the best deals of the decade – and getting cheaper by the day as the U.S dollar continues to slide. The American buck is now trading at a 15-year low versus major world currencies and for the first time since 1976 trades at par-value vis-à-vis the Canadian dollar.
I don’t have a euro-based chart of the S&P 500 Index, but I can tell you it’s incredibly compelling. The above chart of the S&P 500 Index (you can expand it by left clicking your mouse) shows the value of the broader market expressed in dollars; but if we converted the same chart to euros, the cumulative 36% total return since September 2004 would be reduced to just 24% in euro terms. Over the last 12 months, the same index has gained 13.5% in dollars but only 3.2% in euro as the dollar’s depreciation has accelerated following Fed rate cuts last week.
For Canadian dollar investors, whose currency has soared more than 60% since hitting a 125-year low six years ago versus the greenback, American stocks look even cheaper.
The Canadian dollar has gained a cumulative 26% since September 2004. If a Canadian dollar-based investor bought the broader market in the United States three years ago, his resulting net gain would be just 10% after adjusting for the C$s rally.
The best time to buy stocks in a foreign market is when your currency is expensive and the target market stocks’ are undervalued in local currency terms. That’s the case now with stocks in the United States, Japan and most fast-growing markets in Asia and even parts of Africa.
Over the next 12 months, the U.S. broader market is going to post double-digit gains, surprising most investors who are still bearish and worried about sub-prime and housing-related issues. Historically, stock market declines have preceded economic recessions; but thus far, stocks are just 2% from their all-time highs, credit spreads are still tight and commodities prices are soaring – hardly a macro environment for a recession.
U.S. stocks are the bargain of the decade for foreign investors because the dollar is dirt-cheap, earnings are still growing and American multinationals will yield a bonanza from overseas corporate earnings over the next few quarters following a U.S. dollar nosedive.
Call me contrarian, but 12 months from now, you’ll be happy you sold some expensive euro and C$s for undervalued U.S. blue-chip stocks.
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