Strategy & economics

Rally and decline – how political events can affect investment decisions

Political developments can impact how investors view their currency exposure in portfolios

17/08/2017

Caspar Rock

Caspar Rock

Chief Investment Officer

The extreme strength in the US dollar (USD) post the election of Donald Trump, and the extreme weakness in sterling following Theresa May’s speech at the Conservative Party conference, led to the GBP USD exchange rate reaching a level below 1.22 around the turn of the year. Although longer-term measures such as purchasing power parity (PPP) clearly pointed to the fact that sterling was cheap, it was important to look at trader positioning in the currency, as measures such as PPP can remain undervalued for an extended period. Speculative short positions were at extreme levels, in addition to speculative long positions in the USD. As a result, we decided to reduce our exposure to the dollar earlier in the year.

Given the near 10% rally in sterling since then, we reviewed whether we should take on more foreign currency exposure for our sterling based portfolios.

The argument for retaining our position is based around more fundamental arguments. On a PPP basis, sterling has returned closer to fair value, but other valuation measures still suggest sterling is undervalued. Speculative short positions in sterling have fallen from the extremes seen earlier in the year to more standard levels, as has the speculative long positions in the USD. However, it should be noted that sterling has been stronger than would be implied by the increasing interest rate differential with the USD yield curve. Sterling remains sensitive to Brexit negotiations and other domestic political developments.

Taking all these factors into account, we decided that we did not have a strong enough view on sterling to substantially reduce our sterling exposure, although at the margins we have been slightly increasing our non-GBP exposure. Overall our portfolios are currently underweight in sterling.

Author

Caspar Rock

Caspar Rock

Chief Investment Officer

Caspar Rock joined Cazenove Capital in September 2016 and is Chief Investment Officer. He joined from Architas Multi-Manager Ltd, a part of the AXA group, where he was Chief Investment Officer and responsible for all aspects of the investment activities, including investment philosophy, process and team. He also oversaw portfolio management at two of AXA group’s private banks. He previously headed up the multi-manager business at AXA Framlington from 2006 to 2008. Prior to that, he managed a range of directly invested equity and bond portfolios, and was Head of European Equities at Framlington as well as a member of the Healthcare team. He has 29 years’ investment experience. 

Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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Julian Winser

Julian Winser

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