Results for search of category: FX rates

Income in Dollars, Please

Generating an adequate income from euro-denominated bonds is next to impossible, so investors should abandon the attempt. They should embrace currency risk – not try to hedge it away. They should enjoy the fact that US dollar yields are structurally higher than those in the Eurozone. This means owning long-dated Treasuries and dollar-denominated EM sovereign bonds. Finally, they should consider the source currency of their equity dividends and take another look at the Energy sector.  [Read More... ]

Show Me the Damage

So far, most of the damage inflicted by US/China trade tensions has been on EM Equities. Our models suggest they peaked over a month ago and there is no support until we get well into underweight territory. The danger is that equity weakness turns into FX volatility, affecting EMs and DMs. We know this is always dangerous for risk assets in general.  [Read More... ]

Almighty dollar

Many clients are surprised by our low exposure to US Equities given the strong dollar and their performance relative to global equities. It’s a direct consequence of the way we structure our asset allocation model. We could use a currency-based rather than an asset-class approach, but it doesn’t perform as well over the long-term and it doesn’t offer as much downside protection in the event of a correction. In any case, the risk-adjusted returns from US Equities have been bit underwhelming in 2018 to date.  [Read More... ]

Europe Can Set the Agenda

Because of the strong dollar, European investors have a chance to buy emerging market exposure without competition from US investors. EM Bonds already offer attractive risk- adjusted returns when measured in euros or pounds. There may also be an opportunity in selected equity markets like Mexico, India and Israel, even if the overall index is unattractive because of its large exposure to China and the threat of a trade war.  [Read More... ]

Red Flags

Our recommended underweights for Eurozone Financials and EM Equities are at the sort of levels we saw just before major crises such as 2008 and 2010-12. We think that both can be traced back to tightening financial conditions and restricted dollar liquidity. What concerns us is that neither the Fed and the ECB are prepared to admit there may be a problem or that these two themes could feed off each other. We also worry that further devaluation of the Chinese renminbi could put additional pressure on EM Equities and bring a potential flashpoint closer.  [Read More... ]

Selectively Europe

By the time equities regain traction relative to fixed income, we believe Europe will provide the leaders. The main reasons are abnormally low volatility compared with the US and global equities and the ongoing stabilisation of the trade-weighted dollar index. Our preferred countries are the UK, France and the Netherlands. It is too early for Germany and Spain, and maybe too late for Italy. Avoid Switzerland, Sweden and Austria.  [Read More... ]

Actions Speak Louder than Words

Across a broad spread of asset classes and strategies, investors have responded to recent dollar strength by putting on a series of trades which suggest they expect it to continue. This doesn’t prove that it will, but the market reaction has been consistent and immediate.  [Read More... ]

Untangling the Currency Effect

What would happen to investors’ risk appetite if global currency markets stabilised at their current levels? In our view, the cumulative shock from the weak dollar has already reduced the recommended allocation to equities for most developed markets. This includes the US, though not by very much. The only way to avoid further reductions is for the dollar to retrace some its losses. If all major currencies stay where they are, risk appetite in most countries is likely to trend lower. The only significant exception is China.  [Read More... ]


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