Markets worldwide lurched downward this month and Pacific markets were no exception. And both Western and Eastern Pacific currencies continued their decline against the dollar, lowering the dollar value of shares quoted in those countries.

However, currency declines are not a reason to exit your investments in the Pacific, quite the reverse.

Since many Pacific Basin countries remain well managed and their economies continue in good shape, their currency declines mean opportunities for their companies to cash in exporting to world markets in general, and to the United States in particular.

A falling currency can be scary—if it’s falling for the wrong reasons. If a country’s currency goes into free-fall because of a sagging economy, commodity price declines or government overspending, that’s a good reason to avoid that country’s stocks. In such cases, companies find it tough to make money in the domestic market, and there may be shortages of foreign exchange. Also, governments may start taxing companies to make up the money they have wasted.

But that’s not what’s happening with countries in the Pacific Basin. Local economies are mostly performing well. Few of the Pacific Basin economies produce much oil, so they should generally gain from the decline in oil prices. (Colombia and Mexico are exceptions, and Peru and Chile are producers of metals whose price has also declined.)

Most Pacific Basin countries—Japan is an exception—are fiscally better run than many countries of the rich West; they have kept their budget deficits well under control and have not run up huge public debts.

Currency declines in the Pacific Basin are mostly caused by worries about a worsening growth slowdown in China, or a fear that emerging markets may have difficulties raising capital in the event of a credit crunch.

However Pacific Basin countries’ balances of payments and government budgets are generally in good shape, and Pacific Basin currencies have avoided the trap they fell into in the middle 1990s: borrowing too much in foreign currencies. Local debt markets are better developed today, as are local stock markets, and the enthusiasm of foreign investors for these well-run countries has kept them well-financed.

Lower Costs

Their domestic manufacturing costs have been reduced by the devaluation, and many of their other costs, such as transportation and marketing, may also have been cut. They can make their exports more competitive against producers from other countries. In their domestic markets, they will also have become more competitive against imports.

Of course, there are companies which are hurt by a decline in the currency value, notably importers, and domestic retailers relying on imports. Their products will have become more expensive in the domestic market, perhaps moving them out of affordability for some domestic consumers, thereby reducing their sales volumes and profits. However, as it happens in the Pacific Wealth portfolios we do not own any retailers.

One of our Spotlight companies this month, Industrias Bachoco S.A. de C.V., is a good example of the positive effect of a weaker currency. A Mexican meat producer, it has ambitions to expand further into the U.S. market and the 23% devaluation of the Mexican peso against the U.S. dollar in the past year has helped those ambitions a great deal. In the profile on the firm in this issue you can see the effect on second quarter profits.

The effect repeats across the whole region, for all kinds of companies exporting to the United States and other parts of the rich world. Since most of these currencies continued to be weak against the dollar in the third quarter, you can expect the profits bounce to grow for many of these companies.

What’s more, as their share prices, even in local currency terms, have not risen much (and have declined in dollars) when you invest in them you will effectively be buying more earnings for many fewer dollars.

That’s a bargain that should be difficult to resist.

The Effects of a weaker currency ON Our Holdings

The Taiwan dollar has declined only 8% against the U.S. dollar in the past year, but even so Hon Hai Precision Industry (OTC: HNHPF), a contract manufacturer of high-tech goods with large U.S. sales, has benefited with net income up 27% in the second quarter. 

Olam International (OTC: OLMIY) a Singapore-based commodity trader sourcing mostly in Pacific and other emerging markets and selling to the rich West, has seen net income triple in the second quarter – it won’t have hurt, either, that its headquarters costs in Singapore (currency down 11% against the dollar) declined.

Trend Micro (OTC: TMICY) the Japanese security software producer,  reported sales and profits up 11% from the previous year – its home currency has declined 13% against the dollar in the past year.

Yaskawa Electric (OTC: YASKY) our Japanese robots and motion controls manufacturer, reported sales up 11% from the previous year and net income up 29% – again it benefited from the weak yen.

LG Display (NYSE: LPL) our South Korean display manufacturer, saw net income increase 24% even though sales declined 4%—the won is down 14% against the dollar in the past year.

Wilmar International (OTC: WLMIY) our Singapore-based agribusiness group, reported second quarter earnings up 18% on the previous year even though sales declined 12% – again, a generally weak environment for commodity prices was offset by much lower costs in its operations in countries like Indonesia (currency down 17% against the dollar in the past year.)