Last week saw the pound at its weakest ever point compared to the currencies of UK’s main trading partners. By Thursday, sterling was at a 31-year low against the US dollar, with investor confidence challenged yet further by Friday’s so-called ‘flash crash’ which saw sterling drop 6% in a matter of minutes in early-Asian trading, before regaining some of its losses.
For international investors (especially those with a specific base who hold assets in other currencies), such movements, if established, have a significant impact on returns. Currency markets are of course notoriously difficult to predict, even by experienced traders, but they can provide opportunity as well.
Global asset allocators, such as our own investment team, must take care to have a sensible view on this complex area. Currency movements can be a key driver of portfolio returns – as seen this year. Whilst many observers might consider the prediction of currency movements a ‘fools errand’, we would be advocates of having a currency view, even if that meant taking no risk.
Brexit appears to be the dominating force in the continued weakening of sterling, best observed by the Bank of England’s action to reduce interest rates. For sterling investors wishing to take advantage of the longer-term opportunities created by other currency relationships, careful diversification of currency holdings within a portfolio can be rewarding – whether that be through a globally invested discretionary portfolios or multi-asset funds that take an intended international view on the holdings they use.
The potential for a divergence in monetary policy amongst the major economies as we head into 2017, exemplified by Federal Reserve tightening in the U.S., could see currency movements continue to be a significant influence on portfolio returns for some time.
We take care to consider currencies as an asset class, their influence can enhance positive returns and also provide protection against periods of downturn – for many investors US dollars and Japanese yen have historically been considered a safe haven in periods of volatility.
Our clients seek our expertise in managing funds and portfolios, run and denominated in a range of currencies that include the US dollar, pound sterling and South African rand, hedged into other currency classes such as euros and Singapore dollars where appropriate.
The effect of currency considerations can be seen in one of our GBP denominated global funds, that has recently elected to take profits on FX as Sterling has weakened, by modestly reducing its US dollar holding.
Looking forward, commodities currencies could also be well placed to those with a bullish outlook and expecting a rebound in oil. The looming spectre of a Eurozone breakup has serious implication for the euro, and we watch with interest as gold potentially reasserts itself to assume the mantle as the ultimate reserve currency.
Our investment team discusses macro issues on a weekly basis and will continue to look for opportunities to drive returns – while protecting our clients assets – in this intriguing market environment.