Motley Fool Hidden Gems Investing - What “Currency Headwinds” Mean for Investors

Episode Date: October 22, 2022

Expect to hear “currency headwinds” a lot this earnings season. But a strong U.S. dollar isn’t all bad and can make international companies cheaper. Ricky Mulvey caught up with Bill Mann to look at four economies around the world, including: - England’s pension and interest rate problems - The challenges of investing in China -  A massive raw material exporter with a currency that outperformed the US dollar (NOTE: This episode was recorded before Liz Truss resigned as Britain's Prime Minister Companies mentioned: CNSWF, NXGPY Host: Ricky Mulvey Guest: Bill Mann Engineers: Rick Engdahl, Dan Boyd   Learn more about your ad choices. Visit megaphone.fm/adchoices

The Royal Canadian Legion is celebrating its 100th anniversary. And now, our change has a $2 coin to mark this milestone. Honour the Legion's mission to carry forward stories of service and sacrifice to new generations. And their dedication to supporting veterans and their families from coast to coast to coast. Celebrate this enduring legacy. Find the 100th anniversary of the Royal Canadian Legion $2 coin today. Brazil is one of the few countries whose currency has outperformed the U.S. dollar in calendar 2022. Certainly the largest convertible currency to have done so. The real has done quite well.

And it really has to do with the fact that Brazil is selling stuff that people need. I'm Chris Hill and that's Bill Mann, Senior Analyst and Lead Advisor for The Motley Fool's Global Partners Service. I hope your passport is up to date because today we're hitting four different economies outside of the U.S. Ricky Mulvey caught up with Bill to talk about the challenges of investing in China, countries with some opportunities for investors, and what's going on with Britain's pension crisis, and if it's a big deal for the rest of the world. One quick note, Ricky and Bill recorded this conversation before Liz Truss resigned as Britain's prime minister. There's a strong dollar and that's going to be a big theme.

I feel like that's going to be the big theme of this earning season. Macro currency headwinds, if you will. Yeah. It feels awesome to us in America, doesn't it? It should. Well, I mean, it's fun if you're trying to plan maybe a trip to Europe or abroad. But when you hear this theme of currency headwinds, how seriously are you taking that from the companies you follow? And is it something that investors should really be concerned about? Yes and no. I mean, we're here in the United States, so we do have the benefit of being the largest and most diverse economy in the world, we also have the benefit of being the reserve currency. But when you hear the U.S. dollar going in a rapid move one direction or

the other, there are reasons to be concerned because this may not come as any surprise to you as a logician, because if we are the reserve currency, then nobody else is. And so almost every other country, they have their debt denominated in instruments that link back to the U.S. dollar. So when you have a really expensive dollar, trade costs go up, resources prices go up, debt servicing goes up. And mostly, these are countries that we get along with and we want them to do okay. Global commerce is not I win and you lose. Global commerce has done well is something that is aspirationally beneficial to both sides. Having economies, particularly in Europe, struggle so much against the dollar is in some ways really concerning, and it should be to

all of us what's it's like the mcdonald's index where the two countries that have a mcdonald's have never gone to war together that's kind of that's that's the point you're getting at that's a little bit although now that uh russia invaded ukraine that mcdonald's index is no longer oh shoot yeah yeah okay you've heard about this right i i heard about it i just didn't realize that there was a mcdonald's in the in the ukraine i didn't okay well fair enough i know speaking of england let's let's let's let's go there first in european countries we get along with you can't see this if you're listening but um bill man is covering his face it number it bad transition number two of the show that was shame it was straight shame it was it was bad yeah but this

is this is an interesting country for a number of reasons one is just like a is an observer of financial news i'm getting a lot of the uh contagion vibes where where hey could england could England be the contagion that precipitates a larger financial collapse? And they've also got plenty of problems, and I don't know how much of those are internal. So a few of those problems to get you caught up. They've got low growth, higher interest rates, inflation in the double digits. They've got an energy crisis. They've got pension issues because of the interest rate problems. What do you want to go with first with that? Or is it all kind of the same story for our friends in Britain. Well, if we thought describing backgrounds in an audio recording

was great, talking about pensions in England is going to be equally great. Now, if you think about what pensions are, it's a pool of money that pays out on a schedule over 30 years plus. It ought to be the least likely pool of money to have any type of bank run on it. But the way that pensions work, because they have current spending requirements where they have to pay the people who are already in their payout years as opposed to their earning years, pensions have to generate a gain. They have to generate a gain each and every year. It can vary somewhat, but you know what's bad for pensions earning gains is a decade of interest rates that were at zero or below. It's really tough to generate gains when the baseline is no gains whatsoever. So you might not know this about

finance, Ricky, but the way that you get around that is you take more and more risk. And so that's what pension funds have done. And they've essentially taken the easiest to manage pool of money in the world and they financialized them and made them more fragile. So when interest rates have gone up like they have, suddenly the English pension funds have been deeply, deeply at risk. I mean, Kentucky in the United States has had the same problem for years among other state pensions, which is that you make promises. Essentially, a lot of promises were made back in the 80s and 90s at a time of higher interest rates. And it was easy to project that you are going to earn certain amounts on your dollar, and then interest rates go down,

so you have to take riskier investments. Sometimes that works out. A lot of times, it does not. Here's the thing. Pension accounting, even better. For the last person who's left that we haven't inflicted boredom on yet, we're going to talk pension accounting. Pension accounting is bonkers because they don't want the pensions, because the pensions are obligations of the country or the company or whatever, they don't want the pensions to seem that volatile. You kind of get to make up what your implied returns are going to be. So you can say, well, at 7% gains, maybe the pension isn't viable. What about 8%? Let's just say we're going to make 8%. And it changes nothing, but you get to point to a pension that's either fully funded or not fully funded,

even though nothing has changed so england's got a big pension problem the bank of england's what stepping in to buy billions of dollars worth of bonds is that that that's kind of what i've been seeing yeah so the trigger for the the trigger for the pension problem in in england was the new liz trust government coming out and saying we're going to cut taxes right so is essentially what that is, is it caused pension funds everywhere to start selling what are called gilts, which is basically debt of Great Britain or the United Kingdom, I should say. So, they did a very logical thing. But once you start selling gilts, it turns into a spiral. And so, the Bank of England had to step in. I mean, I would describe this as an unforced error, the kind of thing that

maybe someone within the government might have asked someone who knew something about finance to say, maybe it's not a good idea just to come out and say, hey, we're going to cut taxes. But that's what happened. Well, and then the trust government ended up backtracking on that a few days later, but it seemed that the damage was already inflicted from this confusion of the government of England saying, hey, we're going to pump more money into the economy to stimulate growth. Whereas the bank of England had been saying we have double digit inflation and we're, we're trying to extract money from the economy in order to quell that. Yeah, that's right. And then the super good news is that so much of that inflation comes in the form of energy

prices and there's not much way around that. Yeah. Yeah. Speaking, speaking of optimism, let's talk about the, uh, let's talk about that. I'm going to need to take a nap in the middle of this. It's getting bad because the, well, the other thing that the, the, the English are trying to do is, they've got an energy crisis on their hands. I don't know if they're not buying Russian oil again. However, they're instituting price caps of, I think it's about 2,500 British pounds for an average household per year. That's terrible. However, this is a price cap that is for a demand problem. I don't think those charts mix well. No, they don't mix well. Ricky, I have to say, I hate the logical outcome of what they ought to

be doing. I really do. As a person of goodwill, I hate the fact that the logical outcome is that what they need to be doing is buying Russian oil. I hate it, but it's entirely true because Russia is the, they are the fulcrum energy provider. And this is the way that commodities work. If you take out supply, the price goes through the roof, right? So who does that actually hurt? Does that hurt the seller? They sell less, but they sell it at a much higher price. It hurts the buyer. Putting price caps on something that you have a supply issue, that doesn't really help. All that does is creates additional demand for energy that doesn't exist. There's other ways that you can create energy, but not fast enough. I don't know. It's awful, but commodities work

in an entirely different way than higher tech goods, engineered goods. So, you just have to be awfully careful, and I don't think they have been. But before we move on to a country that is a buyer of Russian oil right now, and the reasons why the supply limitations don't work out, when you look at what's going on in England, and I'm seeing the headlines that say economic spiral, financial contagion, that kind of stuff. Are you buying it or is this a problem for England and England only? I'm sitting on the sidelines at the moment. There are some good English companies and there will be plenty of time to buy them. I mean, there are some companies that I adore that are English. Next, BLC, which is a retailer. It's a fantastic, fantastic company.

But I think that there is so much uncertainty just having to do with the basic currency and the basic macroeconomic situation in the United Kingdom right now that there's absolutely no hurry. All right. Speaking of countries buying Putin's oil, and let's call it countries I'm afraid to invest in right now, let's fly over to China, because this essentially, China's happy to buy Putin's oil. They're probably delighted that the price has gone down. This is essentially why commodity, essentially cutting off commodity supplies does not necessarily work in a world economy. It only works if all the actors act the same way you do. Yeah, that's exactly right, which is why, going back to Russia, their amount of receipts for oil and gas hit a record in August. Like, that's just the way it is. Because if we're not buying, that doesn't mean that no one is

buying. So, China bought at a discount for China, but still at a much, much higher price than oil and gas were, say, in January of this last year. Yeah, China's another interesting story. I would say, you know, it's really easy for us as Americans to say you should just buy American companies. It really is. And for years, I have been hopeful that there were going to be opportunities in China. I happen to think, in particular with what's happened with the most recent Communist Party conference, that China is going to remain functionally uninvestable. the 20th Communist Party conference, they told, the party told Xi Jinping that he's been doing such a darn good job that we're going to sign you on for another term, which my understanding is

that's uncommon among Chinese leaders is that they usually serve two five-year terms and then they bounce. But what specifically happened at the conference that cemented your belief that China's uninvestable for Americans right now? Well, I think that we have always hoped, The hope has been that as the U.S. and China integrated economically, that there would turn out to be more and more opportunities in China for Americans to invest, for American companies to invest, for American individuals to invest. What has happened under Xi Jinping is that China has made the decision to be China first. And he has done so in a way that I think we're going to look back and point to Xi Jinping as the person who has destroyed the Chinese economy. And that's

slightly problematic. That's not even a political discussion. That is, why would you go into a country with an autocratic leader who has put plans in place that could actually bankrupt the country. So to me, it's a pretty simple argument. They have basically said that they are going to continue their zero COVID policy. So you can expect that massive cities in China are going to continue to be locked down over periods of time. Their growth rate is going to remain lower. And the thing a lot of people don't really recognize about China is that its local governments essentially finance themselves by selling land bank to developers. You hear about these ghost cities being built in China. Those are actually part of a process to fund local

governments and state governments. And that policy has run its course. One of the craziest markets in the world over the last 20 years has been the property market in China. In a slowed down economy, I do not think that there is much hope for that to continue. If that melts down, then local budgets in China are going to melt down as well. One other policy that I'm struggling to wrap my head around, and a reason why it's difficult to do business in China, it seems, is the chinese government will come in and simply take over companies when they see fit uh pricewaterhousecoopers found that from 2019 to 2021 more the chinese government acquired more than 110 publicly traded chinese companies so i think i think as an investor that makes me

extraordinarily hesitant knowing that at any point the company can be taken over and and for a company um for someone like jack ma your allegiance to the chinese communist party is is measured by your willingness to give up your company to the party, makes it difficult to do business there. I think it does. Now, it's important to note that those 110 Chinese companies were publicly traded in China. Now, there are some companies like Ant Financial, which was about to come public in the U.S. Then there's Anbang, which have had, I don't know that I would describe that either of them as having been nationalized, but they were kneecapped by their own government, absolutely full stop. If you don't know what questions to ask in any market, I don't know

that there is a reasonable case to get really excited to invest in that country. Any other highlights from the 20th Communist Party conference, or are you ready to move on to some other countries? The easiest way to say it is corruption, but they are actually really pushing to ensure that the rising tide raises all boats. So they are going after excess within China. There is now, even for a communist country, and even for a country that was authoritarian, there is a much higher control on public opinion and cultural factors that exist in China than has existed since the Great Awakening began 35 years ago. some of them aren't a terrible idea like what is it they shut video games off at eight and tiktok is dedicated to to more more like science-based programming you sound like a you sound like a parent i i i do but it's also because i don't have any children um i also

feel bad now because i'm just like autocracy maybe not about it that's right hear me out i'm not gonna say i'm too afraid to say anything else yeah me too speak all right let's let's let's go to brazil you've got some notes on brazil we've got a couple more countries to get to before we get to some mail yeah so brazil is one of the few countries whose currency has outperformed the u.s dollar in calendar 2022 certainly the largest convertible currency to have done so the real has done quite well. And it really has to do with the fact that Brazil is selling stuff that people need. They are a massive exporter of raw materials, of timber, of all sorts of gold, metals,

oil, things of this nature. And oddly enough, it's actually a country that has a pretty decent current account. People think of the Latin American countries as being somewhat similar. I mean, you've got 100% inflation in Argentina once again. It's been a couple of years, so they're back at it. I think that there's actually some really interesting long-term things to benefit from being invested more in Brazil. Was it the bee of the bricks? It's the B of the bricks. The rest of them, I wouldn't touch. Well, speaking of countries on this side of the hemisphere,

we're also flying over to Canada. Why is your mind on Canada right now? So, Canada, obviously, a highly developed economy. And Canada has a little bit of its own issues, particularly in their housing sector. If you think that the housing bubble has been bad in certain parts of the United States. Allow me to introduce you to Canada. But Canada is also blessed with a really high quality, deeply entrenched bureaucratic government. And I use the term bureaucratic in the best of terms, meaning that you aren't susceptible as they are in China, Russia, a dozen other countries, dozens, I should say, of having an ideologue come in and change things all that much. Very well-run country, very highly developed, also rich in

natural resources, especially oil and gas and timber as well. Canada is another country where I think I would not be all that interested in certain parts of the Canadian economy, but oil and gas companies in Canada, natural resource companies in Canada, some of the high-tech companies in Canada like Constellation Software, very, very interested. I like this. Going on an optimistic note, we got a couple of questions about international investing that I think are worth paying attention to. This one came from Alex, He says, I want to do research on companies that are not based in the United States, but I'm having trouble finding basically something comparable to the SEC's EDGAR database. So far,

the best approach has just been going to a company's investor relations website, but occasionally they only have the most recent report. Is there a good database to research international companies? Thanks. Not for free, unfortunately. To me, it's not great that this is the case. What I would suggest that you do, Alex, is, and I know this is old school, this is really old school, go to the investor relations website, get their e-mail and ask them to give you information going back, and they'll send it to you. They don't send it to you, maybe you've got the answer from them that they're not wishing for you to take them seriously. But in general, investor relations websites are interested in

investors learning about the businesses. They will send you really as much information as you ask for. I would ask them for two years of financial reports, proxies, and then any third-party research that they have. A lot of times they'll start sending you things like local investment bank reports on their companies, and it's super helpful. But unfortunately, there's not a great clearinghouse for information for international companies. Next mailbag question comes from me. Dollar Strong, for me, that means there's got to be some international bargain opportunities out there. That's one way I've been seeing it, but you've talked about some companies of where to search, Canada, Brazil,

any bargains that have your attention? From RMLV out in the Colorado Heath. I think that there are. In Europe in particular, I would be interested in a lot of their software companies. They've gotten hit really, really hard. Japanese small caps, which tend to be pretty hard to buy in the United States, although there are ETFs that will get you into them. I think it's really important to note that even if we are in a state where we are right now where currencies have gone down substantially against the U.S. dollar. The thing that I've always told myself as someone who's invested internationally for 30 years is that the only constant is change. You remember a couple of years ago, everybody said, well,

they want to be paid in euros because the dollar was going to collapse, or they wanted to be paid in Chinese yen because the U.S. economy was doomed. Those things turned out to be wrong, and I think that they turned out to be wrong simply because every person who has ever made a prognostication has underestimated human ingenuity. And I think human ingenuity will come through again, and I think that these types of issues also will pass over time. Ending on an optimistic note. I like that. We had to get there eventually. Yeah. Guy who talks about things. Bill Mann, I appreciate your time as always. Hope we get to do this again. It's fun going around the world.

Anytime, Ricky. Take care. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. you