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Income Investing

International Flavor

By Roger S. Conrad, on Sep. 27, 2016

The strong US dollar has crimped American investors’ returns in even the strongest international utilities.

A combination of sluggish economic growth and accommodative monetary policies has turned the currency markets into a battlefield since the global financial crisis and Great Recession.

The US Dollar Index, which tracks the greenback’s value relative to a basket of prominent currencies, has rallied almost 30 percent from its low in August 2011. Uncle Buck’s strength over this period reflects a number of factors that have increased its appeal relative to available alternatives.

The collapse in commodity prices has pressured the Australian and Canadian dollars, while the Bank of Japan’s extraordinarily accommodative monetary policy has taken its toll on the yen.

(Click graph to enlarge.)
Currencies

Political uncertainty, sovereign-debt crises in fiscally weak member states and disappointing economic growth are among the headwinds that have buffeted the euro in recent years. Meanwhile, Britain’s vote to exit the EU has hit the pound hard.

Slowing economic growth in China and steps by the central bank to move toward a market-determined currency haven’t helped the renminbi.

Other emerging markets’ currencies have suffered even more. Brazil’s real has rebounded sharply from its nadir but has still lost about 50 percent of its value over the past four years. Mexico’s peso has also given up roughly half its value since 2011.

Every action has its equal and opposite reaction. The US dollar’s strength over the past few years has punished the price of almost every international utility stock and reduced the US dollar value of the dividends that these companies pay.

The Federal Reserve still appears to be the central bank that’s most likely to raise interest rates over the next three to six months, though weakness in the US economy and the impending presidential election suggest that rates could remain lower for longer.

If the Fed were to hike rates in coming months, the US dollar could strengthen further relative to the euro and other major currencies. However, investors expecting a dramatic move likely will be disappointed.

The US dollar’s upward momentum has stalled out this year, eliminating a powerful headwind buffeting international stocks.

When will US investors benefit from buying stocks that pay dividends in a foreign currency? Timing such a call is fraught with risk.

Despite the lackluster growth rate of recent years, the US remains a point of strength in the global economy and a major destination for other countries’ exports. US Treasury bonds also retain their reputation as a haven in unsettled markets.

Investors should consider adding high-quality international utility stocks to their portfolios for three reasons: diversification, favorable valuations and exposure to the powerful secular growth trends that we highlighted earlier in this article. The potential for further downside from a strong US dollar also appears to be limited.

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