Diversify your portfolio with US dollar exposure

SSL in the Money

Jean-Ann Panton

Wednesday, February 15, 2012

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Many investors are looking for a home for their money, and while opportunities exist locally, they should consider some US exposure as they seek to achieve their long term objectives.

The value of the US dollar is affected mainly by the supply and demand of the currency. In times of world economic uncertainty, there is often a flight to quality. Investors flock to the US dollar as a safe-haven, thus driving up its value. Conversely, if investors' appetite for risk increases, they will be more likely to sell the greenback in favour of riskier assets. In this case, the supply of the US dollar increases and demand diminishes, thus leading to a weaker dollar.

Since 2008, the correlation between the greenback's strength and declines in the stock market has tightened. Notably is the comparison of US Dollar Index (USDX) and the S&P 500 Index (SPX) shows that on each of the seven occasions when the Dollar Index (DXY) reached an intermediate high, the SPX hit an intermediate low. Conceivably, in the past few years, no other asset has traded as precisely in tandem with the market as the US dollar.

It is difficult to predict a definitive trend for the greenback going forward, particularly with the global economic uncertainty. The past few weeks have seen the dollar weaken due to the approval of an austerity plan to rescue Greece has reduced flight to the safe haven of the US dollar due to a relative increase in risk appetite. Nonetheless, investors can still benefit from US dollar exposure as it maintains its safe haven status.

US dollar investment opportunities span a wide playing field and savvy investors will view any pullbacks in the prices of securities issued by fundamentally sound companies as excellent buying opportunities.

Fixed income options include but are by no means limited to the following:

*US automaker, Ford Motor Co, offers a bond maturing in 2028 with an attractive yield of six per cent and a coupon of 6.675 per cent paid semiannually. This bond is rated BB+ by Standard & Poor's (S&P) which cited that its ratings on the Company reflect the fact that its new four-year labour contract with the United Auto Workers (UAW) has been ratified and is expected to allow for continued profitability and cash generation in North America. Ford has a two-year track record of profits and cash flow generation in its global automotive operations, supported by solid performance in North America. For 2011, Ford reported a surge in profits to US$ 20.2 billion, up from US$ 6.5 billion fuelled by a one-off payment and strong sales in its home country.

*Another option for those seeking current income as well as US dollar exposure is Gerdau SA, the largest steelmaker in the Americas. The company has a total of 60 steel producing units globally, including joint ventures and associate companies. The joint ventures include a unit located in the US for the production of flat rolled steel and another unit in India. Gerdau's Net Income rose 17 per cent to BRL 713 million (US$401 million) in the third quarter from BRL 609 million a year earlier, far exceeding analysts' average estimate for BRL 281 million. The steelmaker offers a Eurobond maturing in 2021 with a fairly attractive yield to maturity of 5.25 per cent and a coupon of 5.75 per cent. This bond is rated BBB- by S&P.

In terms of equities, a focus on dividend plays is recommended. For example:

*Phillip Morris International is the largest tobacco producing and selling company in the US servicing approximately 15.4 per cent of the global tobacco market selling brands such as Marlboro. The Company has sought to increase growth in emerging markets and this has driven sales for the cigarette maker, helping to boost earnings in recent quarters. In the fourth quarter, Philip Morris' profit climbed 7.6 per cent to US$ 1.89 billion, on strong volume growth in Asia, which helped overall cigarette shipments rise modestly. The stock, which has advanced 35 per cent year-over-year (yoy) to US$ 81.61 (close price on February 13) has a dividend yield of 3.8 per cent.

*Johnson & Johnson also has an established track record of sustainable profits. The Company continues to benefit from its broad-spectrum and diverse business mix of consumer health care, pharmaceuticals, and medical devices. Notably, medical and pharmaceutical devices are its major revenue contributors, ensuring steady growth and stability. Excluding legal charges and costs related to its planned acquisition of device maker Synthes Inc, fourth quarter earnings rose to US$1.13 a share from US$1.03 a share a year earlier. The performance topped analysts' mean estimate of US$1.09 a share as sales rose 3.9 per cent to US$16.26 billion. The stock advanced 6.43 per cent yoy to US$64.68 (close price on February 13) and has a dividend yield of 3.53 per cent.

Overall, even as markets fluctuate investors should take an active approach to investing as numerous opportunities exist. The market continues to look for signals such as stimulus by the US Federal Reserve which should benefit the stock market and prudent investors alike.

Jean-Ann Panton is a Wealth Advisor at Stocks & Securities Ltd. You may contact her at jpanton@sslinvest.com




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