Global market outlook: Potential currency opportunities for investors
We know from experience that quality insights can help lead to quality investing and potentially build long-term investment success. Looking at our strategists’ recently released Global Market Outlook – Q4 Update, it is clear we’ll continue to find potential opportunities to leverage shifting fortunes of currencies globally in order to enhance outcomes for our clients’ portfolios, much like what I discussed earlier this year, in July.
Let’s look for example at how the U.S. dollar (USD) stacks up against the euro: Two years ago a euro could buy about $1.45. These days, it’s more like $1.15. Over the last two years, the U.S. dollar has made similar gains against most other currencies. Importantly, however, trends have diverged recently—creating opportunity.1
As a portfolio manager, like my colleagues on our global team of investment strategists, I also keep a close eye on this ongoing volatility. Considering the fourth quarter of 2015, our strategists are fairly confident that the U.S. Federal Reserve will hike interest rates in December, and we believe that could draw capital from around the globe, further boosting the USD against other major currencies. While that appears to be good news for investors who hold U.S. assets, there’s a caveat: It may not make much of a difference as markets already may have priced in a lot of that rate hike.
Moreover, how well the dollar responds against other key currencies to the initial interest rate increase likely depends on the pace of future hikes. Our strategists believe the path will be slow and steady, and the dollar will benefit from that trajectory versus other economies with easier economic policy trends. But the USD does not look equally attractive compared to all alternative currencies, and at Russell Investments, we believe that one cannot take a view of ‘the dollar’ but rather one should look at the USD versus specific currency pairs one by one.
My team, which pays attention to our strategists’ capital markets insights among other inputs, is monitoring these currency trends closely—ready to use our scalpel. Many in the market place are currently focused on the Japanese yen (JPY) and euro with regards to currency positioning as we were in 2014. As markets rewarded our underweight positions in these currencies over the past two years, however, earlier in 2015 our view was that the valuations had been stretched to the point where underweights relative to the USD were no longer warranted.
That doesn’t mean we don’t see attractive opportunities today – we are just looking in less traveled areas. Specifically, we are focused on those currencies with ties to the commodities complex. The Australian dollar (AUD) and Canadian dollar (CAD) have been under pressure due to weakening economic cycles, poor valuations and negative sentiment. You see, these economies were buoyed in the 2000’s due to China’s insatiable demand for commodities as the nation grew gross domestic product by double digits. This led to currency valuations versus the USD that were significantly overvalued. We think they will continue to face pressure in the coming years as these economies adjust to a slower-growing China.
Amid the back-and-forth fortunes of currency comparisons globally—those with exposure in our portfolio—we believe that an active mindset needs to be fully engaged in most investment strategies, rather than a set-and-forget policy. That’s a key component of my role in managing any asset class in our multi-asset portfolios: Looking for ways to help add and/or protect value in relation to, in this case, currency exposure. Since we know markets aren’t always efficient, there will be times when currencies such as the USD, AUD, JPY and euro will be mis-priced against other currencies. Such shifts present active portfolio managers with opportunities, though not necessarily an edict, to fine-tune particular exposures and potentially add value for our clients.
1Bloomberg data as of September 30, 2015.