Windfall Gains from the Dollar Rally

Hello friends. This is Vijay Bhambwani here and in this video I want to talk to you about an opportunity that presents itself, even though the market might or at least some segments of the market might construe it as an adversity. At Equitymaster, we would basically want to seek opportunities in adversities, and this is exactly one such situation.

Now I subscribe to a 360 degree worldview of financial markets, and I think I owe it to my viewers to basically explain the method behind the madness, the logic and the rationale behind the recommendation. So I'm going to speak with a certain degree of depth about why I'm saying what I'm saying.

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You see in the last 4 to 6 weeks, what we have observed is the US dollar index, the Dixie, has been making higher highs and higher lows. As a matter of fact, the Dixie is now somewhere approximately at its highest after July 2020.

That, of course, has implications for emerging markets, including India. You see as emerging market basket of countries, are import dependent and as a matter of fact, India is a net importer, which means if you deduct imports from the exports income, you will see that net-net, we pay foreign exchange.

So obviously the invoicing currency being the dollar, if the dollar is strong, our import bills go up. Two thirds of all our imports are fossil fuels, which is oil and gas. So the dollar makes a material impact on us.

Secondly, we also have foreign exchange borrowing, both at the corporate level and at the government level in US dollars. So if the dollar becomes expensive, ultimate repayment of that loan is more expensive and in the interim, servicing that loan, which is interest payments, is also more expensive.

So while a lot of people are expressing concerns, including myself by the way, are expressing concerns that a rising dollar is a broad negative for the markets but there will always be gainers from the chaos. The sector and I am talking about very briefly is actually a beneficiary of the dollar strength.

Now, let's come to the second part of this video as to why I think the dollar will strengthen from here, or at least why there is a strong probability that the dollar will strengthen from here.

You see, the US is slated for a midterm elections in 2022. President Joe Biden will face an acid test about how popular or otherwise the average US citizen receives him to be. Obviously, inflation has to be brought down. Unemployment rates have to be brought down; per capita incomes must go up. There must be goody, goody things in the economy. You know the drip.

Now, the US is very simply the world's largest debtor nation, which means that pose a lot of money to a lot of countries. Now, the way you can manage, or at least partly manage your debts, is to make you a local currency so strong, that you have to spend very few dollars to repay the nation you owe money to in their currency.

Of course, the US also imports a lot of stuff. A lot of goodies from Asia, from Europe, from the Middle East. So if the dollar is strong, the landed price of important goods in America is kept low, so that subdues inflation. Before elections, every politician would want inflation to be low, so he gets a clean bill of health and a clean chit from his voters about a good job that is doing, which is what President Joe Biden and the US Federal Reserve will attempt to do. They will want to keep the dollar up so that they can manage inflation and they can basically manage their external debt as well.

Now, for the third and final part of this video, which sector am I banking on to be a relative outperformer of the markets thanks to the US dollar strength?

Friends, I think I would want to place my bets on the information technology or the software sector. Software, of course, being a very focused area in the IT space, IT would actually include a broader gamut of services and I think this segment, which has a lot of dollar based revenues due to the net exporting nature of the industry, stands to benefit because when it receives the dollar, the dollar will be higher. That means more rupees they will get when they convert the dollar to rupees.

As per the laws of the land, you have a time limit in which you have to convert all export inward remittances in rupees. You can't hold it in dollars because the country needs foreign exchange. So when the dollar becomes strong, the rupee income of exporters become strong. This is why the IT sector should be doing quite well in 2022.

Now if the market is appearing to be a little nervous in 2022, which is why, if you remember in my Diwali video, my top pics from this Diwali 2021 to Diwali 2022, was the Nifty ETF, because I have explained to you multiple times why the Nifty falls less and a falling market and rises more and a rising market and my second best option was the 10-year benchmark bond. So you know that I am taking a very conservative stand for 2022.

Now some of my viewers will want to know what happens if the overall markets corrects in 2022. Will this software sector or technology sector continue to go up even though the market is kind of soft?

I think that is a possibility but I'm basing my hypothesis on relative outperformance. Relative outperformance means just like the Nifty ETF case that I have built with you in so many videos in the past, if the broader market is falling 10%, if the security that is being compared with the broader market falls 3%, there is a relative outperformance by this security, which means when the market fell 10% this security fell only 3%.

So I do believe that even if the broader markets correct, the technology stocks will either be sideways or will fall far less. You will get a good cave to hide your money in and when the market starts to rise again, of course, the technology space will jump by leaps and bounds.

Now, compliance issues restrict me from naming names but hey, I'm on my viewer side. This channel, my playlist, is created to help you earn more money and derive the best experience you can from the market. So without broadly naming names I'll tell you within the space as to which companies you should go for.

I would prefer the BFI space, the banking, financial, insurance space. So software companies that are catering to these sectors, should do very well. Then the mobility and transport space. Any company that's involved in from providing software solutions to companies that have systems to track moving objects, vehicles, call it what you want, cars, buses, trains, aircrafts, whatever, that's enough of a broad hint.

You should be buying those stocks and those companies which have a strong presence of onsite engineers so that their visas to engineers is not really a problem. So somebody who actually has not one but two feet into the door in the US market rather than just one foot blocking the door from shutting the door to the company. So some companies that have very well entrenched.

Now you see to a reasonably savvy investor, I have fallen short of actually giving you the names on the platter. So I think investing your money in the IT space should see exemplary returns in the year 2022. You may not exactly see the rise of FAANG kind of stocks that we saw in 2020-2021. FAANG means Facebook, Amazon, Apple, Netflix and Google. You may not get those kind of exact returns in percentage terms, but hey, we are in the business of dealing with probabilities and outperforming other sectors of the economy, and IT appears extremely promising.

On this buoyant and optimistic note, I'll bid goodbye to you, my friends, not before reminding you to click like on this video if you agreed with what you saw, if you liked what you saw. Subscribe to my YouTube channel, if you haven't already done so. Click on the bell icon to receive instant alerts about fresh videos being put up out here.

Good, bad, ugly, I'd love to listen to you in the comments section and get your feedback. Also help me reach out to fellow like-minded investors and traders by referring my videos to your family and friends. I thank you for your patience and being with me in this video.

Till I meet you again in my next, this is Vijay Bhambwani signing off for now. I wish you have a very, very profitable day ahead. Thank you. Bye.