The question was interesting, and I've been thinking about this for while and wanted to put together some thoughts I have on it. Mainly this would apply to European periphery countries right now but could really be any country at some point in the future.
If anyone has access to the data I'd be interested in knowing how companies that matched my criteria in Argentina back in 2001 did after the devaluation.
What is a devaluation?
Simply put a devaluation is when some sort of event takes place that makes a countries currency suddenly worth less. On Monday 100 units of currency are required to buy an item and suddenly on Tuesday 150 units of the same currency are required to buy the same item. This isn't inflation, it's when the currency is deemed to have less value. The mechanism for this to happen isn't always the same, in the case of Portugal a devaluation would most likely occur if they left the Euro and began to use the escudo again. In the case of a Portugal the country would be using the Euro on Monday, and suddenly on Tuesday all Euro deposits would be replaced by some escudo deposits possibly at a reduced rate, or at a much higher conversion rate.
How to invest?
The general idea is to find a company that will be unfairly punished in a devaluation, or a company that might benefit from a devaluation. Here are a few bullet point thoughts on what might be good to look for.
- Most important, the company needs to be export driven, most sales should come from out of the devalued country, greater than 75%.
- The company should have a solid earnings stream, this closely relates to the above bullet.
- Avoid companies that are cash heavy unless the cash is foreign denominated (and even still be wary).
- Avoid companies with large receivables in the new devalued currency.
- Look for companies with payables in the new currency.
- High debt isn't always bad if it's in the new currency, is devalued and can be paid off with export sales in a foreign currency.
- Look for some sort of competitive advantage, or brand. Will an exporter have a stigma attached because they operate out of a devalued country? Global recognition should mitigate this risk.
- Put limited emphasis on assets, these will be worth much less after a devaluation.
- The exception to the above bullet is if the assets are extremely rare and supply is limited. A priceless asset might apply as well.
A devaluation could be a catalyst for a generally marginal business. If the business has local denominated debt, local labor and exports their suddenly strong earnings stream will be able to quickly reduce debt and margins will increase with their new lower labor costs.
Here are two possible investments in Portugal
A decent business with a good earnings stream likely to be unharmed:
A marginally profitable exporter that could be helped by a devaluation:
Disclosure: Long COR