The dollar has undeniably suffered as a result of the COVID-19 pandemic over the last couple of years.
The Fed’s response to the worst unemployment rate in modern history has been, mainly, to print more money. This has inevitably led to a fall in the dollar while sparking previously non-existent inflationary fears in an already spooked market. This combination has resulted in some pretty dramatic predictions.
Goldman Sachs strategists, for instance, have cautioned that the current U.S. policy is triggering currency “debasement fears” that could end the dollar’s reign as the dominant reserve currency in global foreign-exchange markets.
That might sound dramatic, but their fears are shared by many other analysts. For a segment of the economic community, a dollar crash appears inevitable – with Yale Economist Stephen Roach predicting a 35% drop in value against other major currencies.
In this piece, we’ll take a look at the implications of a falling dollar and what opportunities this creates for other financial assets, including stocks.
To Forex or Not To Forex?
As the value of the dollar drops, other assets have risen sharply. This includes the price of gold, the “traditional” hedge asset against dollar volatility, but also some (slightly) more surprising investments.
The price of Bitcoin, for instance, has also risen precipitously in the past month. This adds credence to the results of recent research indicating some cryptocurrencies are now more trusted than many large financial institutions due to the security offered by crypto wallets, and particularly among younger investors and in times of crisis.
At first glance, the falling dollar would seem to provide a major and direct opportunity for investors in the Forex market. However, investing directly in Forex can come with significant risks, especially for investors without specialization in the market. Forex investing often uses leverage that requires investors to be correct on the timing and direction of their bet. On this point, it’s worth noting that even those analysts who have predicted a major fall in the value of the dollar over the next few years have carefully hedged their predictions.
A lot depends on how and when the Fed decides to take further action to combat the recessionary effects of the COVID-19 pandemic. The added political pressures of an upcoming presidential election make policy predictions even more difficult.
For this reason, the smart choice for investors might not be to take advantage of a volatile dollar directly, but to invest in stocks that will benefit from the likely fall in the value of the dollar.
Three Options: Citi, Fintech, and Digital
Translate this macro advice into a specific investing prescription and one US bank stands out: Citigroup. Citi is currently the US bank with the largest international presence by a fair margin, and thus will potentially gain the most from a falling dollar.
At the moment, Citi stock has taken a beating based on investors’ expected future pain from credit cards and loan losses which have yet to materialize in its earnings. If the international exposure provides more of a buffer than investors expect, Citi starts to look like a real bargain – especially for investors with a medium- to long-term time horizon for their investment.
Some other financial stocks will also benefit from a falling dollar. For instance, most digital banks and fintech companies have significant international exposure. In many cases, this is the primary value of these firms, whose business model aims to take advantage of convenient international investing and a more efficient cross-border remittance experience.
It is therefore likely that digital banks will also benefit from a falling dollar, and should perform well over the next few years. For much the same reason, Fintech stocks are showing great promise, and have become a popular way for momentum investors to secure high returns in the short- to medium-term.
In fact, it’s really the stocks from small, young fintech firms that now represent some of the best options for stocks that are available for under ten dollars apiece, especially in firms that are established internationally.
Why Bank Stocks are a Smart Choice
For stock investors looking to take advantage of the falling dollar, bank stocks are one sector where investors are looking for value. With the world economy still reeling from the impact of the COVID-19 pandemic, many large service companies are feeling their business models pressured to change significantly in order to remain competitive in a post-COVID world. Banks, however, offer a relatively stable store of value for stock investors, a realization by investors which has likely led to an increase in bank stocks in the past month.
Among those increasing their investment in banking stocks is Warren Buffett, who purchased another 21.2 million shares of Bank of America stock earlier this month for a total cost of $522 million (or an average price of $24.65 per share). This sale is particularly striking because Berkshire Hathaway, Buffett’s investment firm, already owned a huge amount of stock in the company.
With the recent investment, Berkshire now effectively owns fully 11.8% of the megabank, the stake is the second-largest position in the company’s portfolio, and is the largest of Berkshire’s many bank stock investments by a wide margin.
Banks are also likely better insulated from this crisis than they were in 2008. The capital requirements banks are required to hold as reserves against their assets are much more conservative than during the last recession. Also, much of the riskiest lending has slowly shifted from banks to non-bank lenders. When these factors are combined with the impact of government stimulus and ongoing emergency lending, it is likely that loan losses will be much less severe than during the Great Recession.
Whether it’s Citigroup or Bank of America, smart money appears to be flowing into banking. It’s certainly possible to profit from investing in bank stocks directly, and in recent years many of the mobile trading apps have made this much easier than has been historically.
However, it’s also worth noting that not all banks (and therefore not all bank stock) are created equal. Banks largely focused on the domestic US market are unlikely to benefit much from a falling dollar, and could in fact see their market capitalization decrease in markets outside the US due to the inflationary impact of future Fed policy.
On the other hand, banks (and other companies) with significant levels of international sales are likely to see huge benefits from a falling dollar, which will spur international investment. For that reason, Goldman analysts say that stocks with high international sales will benefit the most from the current volatility, and should be a target for investors.
It is, of course, no secret that the dollar is losing value, and that the Fed’s response to the COVID-19 pandemic is likely to drive dollar inflation over the next few years. However, taking direct advantage of this fact – by trading on Forex markets – is unlikely to be the best choice for those investors who don’t have experience in this market.
Instead, our advice would be to buy bank stock, preferentially in banks with significant international exposure. These banks, and especially smaller, more agile fintech startups, are likely to benefit hugely from increased international investment and sales, and by investing in them you can too.
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