Why The US Dollar Will Stay The Reserve Currency This Year And Beyond

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The U.S. dollar will stay the reserve currency in 2014 and beyond according to a research report by Barclays. This is because there is no serious competitor despite the U.S running persistent current account deficits. poor fiscal position, loss of AAA credit rating and the ongoing QE program run by the Federal Reserve.

In addition to the above factors, three other factors that matter for the reserve currency status are: liquidity, depth of local capital markets and investor faith. In each of these categories the U.S. beats other major developed economies.

a) Liquidity

The US dollar is the most liquid currency by a wide margin. The nearest competitor Euro has a daily turnover of only about one-third  in the forex market relative to the dollar.

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US Dollar Most Liquid Currency

b) Depth of local capital markets

The U.S. sovereign bond market is the largest in the world. Hence it is highly liquid for investors and prices are not easily distorted when someone winds up even a smaller position.

US Sovereign bond market

c) Investor faith

The dollar and its underlying assets still retain investors’ faith even during times of great stress. For example, during the global financial crisis the dollar and treasuries benefited greatly as investors piled into them seeking safe heavens.It is ironic that investors put their faith in the same country that started the financial crisis causing the loss of billions of dollars.

Serious competition to the domination of the US dollar as the top reserve currency is non-existent. Norway has strong fiscal balances, runs a strong current account surplus and enjoys the AAA rating. However the Norwegian Kroner(NOK) cannot compete vigorously against the dollar since the local capital market is shallow, the currency is illliquid and underperforms during times of stress.

The Japanese Yen and Euro are two of the other possible substitutes for the dollar. But Japan’s fiscal position and Europe’s internal fights among member countries make it unappealing to investors.

The next contender for the reserve currency status is China’s Renminbi. However it is unlikely to attain that position anytime soon since China’s capital markets are immature and its currency is illliquid. China’s capital controls and managed nature of the currency also does not help.

In summary, the US dollar will remain the top reserve currency for the foreseeable future.

Source: Compass, December 2013/January 2014, Barclays

Typical Mutual Fund Investor Behavior

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I came across the following chart showing the behavior of the typical mutual fund investor:

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Mutual Fund Investor Behavior
Source: Behavioural Finance and Mutual Fund Flows An International Study, Deutsche Asset & Wealth Management

 

Obviously the essence of the chart is applicable to stock and ETF investors as well.

 

Related:

Why We Buy in a Marked-Up Market, Jan 13, 2014,  NY Times

Canadian Non-Resident Withholding Tax Rates For Treaty Countries

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The withholding tax rates for interest, dividends, royalties and pensions/annuities earned held by foreigners from Canadian companies are listed in the attached document below. These applicable amounts based on the tax rates are withheld by the Canadian government. These rates are defined in the tax treaties in effect between Canada and the specific country. So if you are a British citizen and invested in a Canadian company you can use the table below to determine the appropriate rates.

Click on image to download (in pdf)

Canada Withholding tax Rates

 

Source: KPMG

The Canadian withholding tax rate for dividends for individuals of most countries is 15% although there are exceptions. For instance, citizens of Turkey are charged a higher rate of 20%. Canada does not withhold taxes on dividends received by U.S. residents in qualified retirement accounts.

The standard Canadian withholding taxes on dividends is 25%. But due to the tax treaty between the Canada and U.S. , U.S. residents are charged a reduced rate of 15% by Canada.

Debt Levels By Type and Country

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Debt levels remain high across the world especially in the developed countries.However debt levels vary by type and country as shown in the following chart:

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Debt levels by country

Source:Vanguard’s economic and investment outlook, Jan 2014,  Vanguard

Debt held by the Federal government, households, non-financial and financial firms in the U.S. and Germany is moderate(between 50% and 100%)  as a percentage of GDP. The UK is similar shape except the financial institutions there are still in a mess. While the U.S. took swift action after the financial crisis and financial firms especially the banks cleaned up their books and raised capital, British banks failed to take proper actions. The painfully slow British political and regulatory system did not help to speed things up either.In Japan households are in much better shape than corporations and the federal government in terms of debt levels. Similarly Chinese households have low debt levels.

Vanguard predicts the global economic recovery to be modest over the next compared to the previous two decades.The chart below shows the potential growth rates for the world’s major economies:

Global trend growth

The long-run economic growth potential of BRIC countries is higher than that of the developed countries including the U.S. However it should be noted that high economic growth does not necessarily mean higher equity market returns.

Related ETFs:

  • iShares MSCI Brazil ETF(EWZ)
  • Market Vectors Russia ETF (RSX)
  • iShares FTSE/Xinhua China 25 Index Fund (FXI)
  • iShares MSCI Emerging Markets ETF (EEM)
  • Vanguard Emerging Markets ETF (VWO)
  • SPDR S&P 500 ETF (SPY)
  • SPDR STOXX Europe 50 ETF (FEU)

Disclosure: No Positions

Are Spanish Stocks A Good Buy Now?

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Spain was one of the hardest hit economies during the global financial crisis and the following European sovereign debt crises. Before the crises the Spanish economy grew rapidly over many years attracting international investors. As a result of the crises,  the economy tanked primarily due to the bursting of the once red-hot real estate industry.The country was saturated with “white ghost” infrastructure projects like massive airports with no flights, unsold residential apartments and condos, etc. Not surprisingly investors fled Spanish stocks.

After years of low growth the Spanish economy finally seemed to have turned a corner. Last year the benchmark IBEX index rose over 21%. It is up by 3.80% year-to-date, the best among major European indices. On the other hand the S&P 500 is mostly flat YTD.

From a recent Reuters article on Spanish equities:

By contrast, Spain’s service sector registered its fastest pace of growth in six-and-a-half years in December, fuelling optimism the economy could expand more than expected in 2014.

Spain and Italy – another economy dubbed as a “peripheral” European market compared to the “core” of Germany and France – are slowly recovering from the euro zone’s sovereign debt crisis, and the rise in the IBEX also lifted Milan’s FTSE MIB stock market by 0.6 percent.

Some traders and investors feel there is more value in those “peripheral” markets than the likes of France or Germany, with the German DAX equity index having already hit record highs.

“There’s a real swing in momentum towards economies such as Spain,” said Scott Meech, co-head of European equities at Union Bancaire Privee (UBP).

Meech’s favoured Spanish stocks include Spanish bank Bankinter, insurer Mapfre and media company Mediaset.

Source: Spanish stock market outperforms weak European bourses, Reuters

The following chart shows the 5-year performance of the STOXX Spain 20 Index which is comprised of the 20 largest blue-chip Spanish firms:

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Stoxx Spain 20 Index - 5 years Return

Note: The returns shown are in US dollar(price) terms.

Source: STOXX

It is interesting that while in the past five years the STOXX Spain 20 Index is up by about 27%  in the past one year alone it has increased 27%. The chart is showing an upward trend since 2012.

From an investment standpoint, Spanish stocks are looking attractive now given the improving economic situation and the changing perception of global investors. Though stock prices were much cheaper last year it is still not to late to buy them at these prices. Spanish stocks currently have a dividend yield of 3.9% and a P/E ratio of 19.8 relative to US stocks’ yield of 1.9% and P/E of 19.7 according to the latest FT market data.

Five Spanish firms trading on the US markets are listed below with their current dividend yields:

1.Company: Banco Santander SA (SAN)
Current Dividend Yield: 8.80%
Sector: Banking

2.Company: Telefonica SA (TEF)
Current Dividend Yield: 2.29%
Sector: Telecom

3.Company: Iberdrola SA (IBDRY)
Current Dividend Yield: 0.61%
Sector: Electric Utilities

4.Company: Gas Natural SDG SA(GASNY)
Current Dividend Yield:
Sector: Natural gas and electric utilities

5.Company: Repsol SA (REPYY)
Current Dividend Yield: 3.14%
Sector: Oil, Gas & Consumable Fuels

Note: Dividend yields noted above are as of Jan 10, 2014. Data is known to be accurate from sources used.Please use your own due diligence before making any investment decisions.

The iShares MSCI Spain Capped ETF(EWP) gives exposure to top Spanish companies.There are 24 firms in the portfolio with the top 10 accounting for about 72% of the fund.Over 44% of the fund is  invested in Banco Santander(SAN), Banco Bilbao Vizcaya Argentaria(BBVA) and Telefonica (TEF).The ETF has about $982 million in assets and the 12-month yield is 2.86%.

Disclosure: Long SAN, BBVA