Blame Canada!

This is the chorus to the main song from South Park, The Movie.

Actually I don't blame Canada for anything.

Yesterday the Canadian equivalent of the Federal Reserve raised interest rates to 3.25% and a couple more are expected in the coming months. The New Zealand equivalent is likely to raise its cash rate to 7.25% later this week.

In some of the smaller countries increasing rates can be a good thing for the stocks from those countries, in dollar terms. There are many explanations for this but the simple way I look at it is that there are fewer moving parts in these places. Higher rates, everything else being equal, causes capital to flow into that currency and a portion of that capital finds its way to the equity market.

The US is always more complex than that and sometimes Japan is as well. There has been a lot of chatter on CNBC Asia and Europe, and far less on CNBC US, about interest rate differentials lately. This stands to be important for US investors that own stock from other countries.

Australia get a lot of attention in this regard. Australia's overnight cash rate has been in the fives for quite a while. Early on in the US rate hiking cycle the interest rate differential was obviously very wide and made buying the Aussie and easy decision. That differential is now much narrower than before which makes buying the Aussie not such a layup. When US data comes out that leans to the Fed stopping sooner than later the Aussie goes up and data that says the Fed will keep going makes the Aussie get weaker.

The European Central Bank just raised rates to 2.25%. If they keep going there will be some Euro strength as the current rate differential between the US over the euro narrows.

I think the importance of how much this can help or hold back is subjective. For a long term investor it is important because these things can help reduce volatility short term and add to returns long term (remember that US markets lagged foreign in the 1970s, 1980s and so far in this decade). Over the course of one year in may not matter much.

For a portfolio manager it can add basis points to return. That can be a very important way for a portfolio manager to add some value from the top down.

Generically speaking, I am up quite a bit for the year compared to the S+P 500. One reason is that a lot of foreign stocks have out performed similar domestic stocks and and different times this year the currency moves have mattered.

The energy sector makes for an easy example. I own two big, slow moving, mega cap, integrated oil companies for clients. This is probably reasonable for a managed account but instead of owning Exxon Mobil clients own British Petroleum and Statoil. BP might be up a hair, literally, more than XOM but STO ( I disclosed this holding on Forbes on Fox in July) is up dramatically. I have blogged the process that took me to STO several times but the starting point was the simple desire to be overweight foreign.

There have been other helpers too this year but this has been an important one.