Onuekwusi, lead manager on LGIM’s Multi Index range, said that despite the Greek governing party having hashed out a deal with the EU regarding debt repayment in February, he is wary of ongoing dissent emanating from with Germany.
The Greece-EU stand-off, combined with the European Central Bank’s announcement of its €1.1tn quantitative easing programme in January, has lead Onuekwusi to add significant US dollar hedging to his portfolio.
“While Greece has since reached a sort of compromise with the ECB, we have decided to keep it on as we do not believe the saga is over,” he explained. “Every day there is new rhetoric and noise coming from Germany, and, while the relationship may not be deteriorating as such, there is a lot of political posturing. They need to formalise a new plan.
“If Greece fails to meet the deadline in implementing the austerity plan that the EU wants, there will be downside risks. Combined with QE, it makes sense to be negative on the euro.”
As a result, at the end of January Onuekwusi hedged 50% of his European equity exposure into dollars – a shift which he believes can both guard against the negatives and benefit from the positives.
He said: “As the Greece saga unfolded we hedged most of our European equity euro exposure into US dollars because we see the main currency relationship lying between dollars and euros, rather than sterling and euros.
“Given that the Fed is going to be the first major central bank in the developed economies to start increasing interest rates and the ECB has just started quantitative easing, it made sense to hedge into dollars.
“On the dollar side there are clearly upside risks, and the Fed needs to manage expectations over an interest rate rise so the market does not get ahead of itself.”
