Strategy & economics
Rally and decline – how political events can affect investment decisions
Political developments can impact how investors view their currency exposure in portfolios
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.
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 33 years’ investment experience.
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