Architas senior investment manager Nathan Sweeney expects markets will reassess the recent dollar trend and emerging market equity will move higher in the long term.
The recent emerging markets sell off was an opportunity, Sweeney says.
“We remain positive on emerging market equities because of the long term decline we expect to see in the dollar. These regions also look more attractive given the potential for strong earnings and stabilisation in inflation in some of the key economies.”
Treasuries will become less attractive as higher government spending continues to increase its level of debt, he says. Additionally, Chinese demands to pay for oil, gold and other commodities in yuan is hitting the traditional dynamic whereby commodity purchases provide support for the US currency.
Andrew Harman, senior portfolio manager at First State Investments, has been avoiding US dollar exposure since September 2016.
“The recent strength in the US dollar, especially versus sterling, has us revisiting that view in the short term, although we expect the US twin deficits to weigh on the dollar in the face of increasing interest rate differentials,” he adds.
Harman has selective exposure within Europe and emerging markets, across both sovereign debt and equity. He lists Italy attractive for equities, while South Africa has offered attractive valuations within government bonds.
“With an outlook for a weaker US dollar, higher interest rates, and high valuations we currently find US equities and most US denominated assets unattractive,” he says.
Mug’s game
In contrast, Liontrust’s John Husslebee prefers not to take currency views.
“We would agree that currency moves are unpredictable at least over the short to medium term. Hence we chose to construct all our family of target risk portfolios using long term data taking into the history of currencies as well as inflation,” Husselbee says.
However, Sweeney argues in the current environment currency fluctuations are more volatile and therefore investors need to consider the impact, even if they have not in the past.
“This is in large part due to government or political interference and the current preference for weaker currencies to provide support to domestic economies,” he says.
“Donald Trump is a good example of this given his clear wish for a weaker dollar,” he adds. “I expect Europe, Japan and the UK to follow suit in due course, all of which creates a more volatile background for currencies globally.”
James Esland, investment director at Aberdeen Standard Investments, says currencies’ short-term unpredictability means he tries to reduce the volatility in portfolios by creating a balance of exposures.
Domino effect
In the short term, export-focused European and Japanese equities do well when the US dollar stengthens, as does the FTSE 100, where a lot of profits are derived abroad, Esland says. Conversely, emerging market assets prefer a weaker greenback.
“The key is to blend these exposures so that any weakness in emerging allocations can be compensated for by European or Japanese exposures,” he says.
Anthony Gillham, Quilter’s multi-asset head of investment, says a weaker dollar tends to be accompanied by greater liquidity in global marketss.
“This was a contributing factor in emerging market growth in 2017, although a recent spike in the dollar detracts from that somewhat,” Gillham says.
“If inflation weakens that may further encourage the Fed to ease off, which could give renewed impetus for emerging markets alongside continued robust global growth.”
