Hermes’ Murray sees an opportunity to make money by positioning for the short-term weakness in the pound and euro. “Given global central bank policy remains formidable, in an uncertain environment the US Fed has acknowledged that any upward movement in the dollar can restrict global financial conditions, perhaps by more than an actual rate rise would achieve,” he says.
“If their concern has shifted towards deflation rather than inflation, on the back of a multitude of foreign risks that include China and Brexit, the Fed may be more keen on a weaker dollar to assist the reflation trade by putting a bid into commodity prices.
“However, this is countered by currency’s re-emergence as a safe-haven play. Against this, further weakness in sterling and the euro may offer investors a tactical currency trading opportunity.
“Aside from likely sterling and euro weakness and, conversely, dollar strength, other currency moves may provide short-term opportunities. The Swiss franc and the yen will continue to operate as safe havens in risk-off environments,” says Murray.
The old adage
Says Turner: “Investors would be wise to maintain their exposure to dollar assets. We currently have an overweight position in US equities within a diversified portfolio, which should benefit from the relative resilience of the US economy.
“Further support for the dollar could come from the Fed, which is in a better position than any other global bank to raise interest rates. This is in contrast to the easing we are seeing elsewhere.
“The risks lie primarily with sterling-exposed assets. As the initial shock of the UK’s vote to leave the EU fades, investors still need to remain wary of their exposure to UK assets. Should the slowdown in the UK economy prove bigger than anticipated, we are likely to see more substantive monetary stimulus introduced by the Bank of England.
“The subsequent weakening of the currency will leave domestic sterling-exposed assets at risk of global underperformance.”
Turner says diversification is more important than ever. “It might be something investors have had drummed into them, but the old adage of diversification has never been more relevant.
“Political risk is high at the moment and it is unlikely to get any easier over the next 18 months, with elections in the US, Germany, Netherlands and France. These events have the potential to move markets,” he says.
“A diversified portfolio is the most appropriate way to navigate the unchartered waters ahead over the next 12 months.
“In such an uncertain environment, we continue to hedge exposure to currencies across our tactical positions within a diversified portfolio. Investors should be mindful to eke out returns based on an underlying investment case, and avoid being hit by adverse currency movements.”
