- Head of Multi-Asset Strategy – APAC
Skip to main content
- Insights
- Capabilities
- Funds
- Sustainability
- About Us
- My Account
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Last year, there were many large moves in currencies — not just in the US dollar but in the Japanese yen, the Australian dollar, and the British pound, among others. We expect that higher currency volatility will remain in place in 2023, spurred on by elevated levels of economic and asset price volatility, as well as divergence in countries’ policies, cycles, and inflation challenges. The impact of government intervention in currency markets also bears watching.
All of this suggests that currency risk within portfolios may be elevated relative to recent experience — perhaps even occasionally overwhelming the impact of fundamental views on companies. Volatility and dispersion could also create opportunities to generate alpha through active currency management. The bottom line is that it may be time for a fresh look at the impact of currency on portfolio construction.
As a starting point, investors should be aware of the underlying currency exposures within their equity and fixed income allocations. Those insights will help sharpen the focus on specific currency approaches, which include:
Of course, each approach brings with it certain trade-offs. Figure 1 illustrates the different levels of both operational and investment complexity involved in various currency-hedging strategies:
Operational complexity — Currency hedging introduces operational complexity, not just at initiation but also to maintain hedges through currency forward rolls. This is highest for hedging processes that require constant change, including active management and premia harvesting.
Investment complexity — Currency hedging can have a range of effects on investment complexity. Fully hedging currency effectively eliminates the impact of currency variations on portfolio returns. A fully unhedged approach exposes the portfolio to the impacts of currency movement, which can be either diversifying or volatility enhancing depending on the nature of each investor’s home currency and underlying portfolio currency exposures. Active currency management involves higher levels of complexity. Asset-class hedging can be a middle ground. For example, some investors prefer to hedge fixed income currency exposures given the larger proportional impact of currency volatility on fixed income relative to equity portfolios.
Currency markets aren’t the only area where volatility is elevated. Our 2023 Outlook offers a wide range of views from our iStrat Team on economic and market conditions and the asset allocation implications, including inflation hedging, downside mitigation, and factor-based insights for volatile, sometimes directionless markets.
Expert
4 equity themes: Budding opportunities in small caps and more
Continue readingPicking the right building blocks for a climate-aware portfolio
Continue readingThematic investing focus: evolving the current generation of energy
Continue readingURL References
Related Insights
Stay up to date with the latest market insights and our point of view.
Can hedge funds play the role?
How should investors select the most suitable types of hedge funds for specific roles? Members of our Investment Strategy & Solutions Group offer a simple and intuitive framework that can help.
4 equity themes: Budding opportunities in small caps and more
Starkly different policy agendas from Biden and Trump are examined in terms of how they may affect the supply side of the US economy.
Picking the right building blocks for a climate-aware portfolio
For asset owners integrating climate change into their multi-asset portfolios, members of our Investment Strategy & Solutions Group offer five important insights.
Japan equity: Reason to believe
Our expert argues that corporate governance reform and the Japanese economy's escape from persistent deflation have laid the groundwork for a sustainable equity rally.
Thematic investing focus: evolving the current generation of energy
The energy transition is taking place amid a greater focus on energy security and affordability. What could this mean for the role of traditional energy companies, ask Keith White Daouii Abouchere and Megan Galligan.
Thematic investing focus: the next generation of energy
The decarbonisation process represents the biggest capital cycle in our lifetime. As we develop the next generation of energy, Keith White, Daouii Abouchere and Megan Galligan examine how thematic investors can make the most of this structural opportunity.
Risky business: Is now the time for surplus action?
Tim Antonelli, Head of Multi-Asset Strategy – Insurance and Portfolio Manager, considers insurers' renewed interest in risk assets and offers his views on areas that may be worth a closer look.
Do fundamentals support a risk-on tilt?
Surprisingly strong economic growth, declining inflation, easy financial conditions — can it get any better for markets? Members of our Investment Strategy & Solutions Group offer their outlook, including their latest views on equities, bonds, and commodities.
A blueprint for building climate-aware multi-asset portfolios
Members of our Investment Strategy & Solutions Group take a deep dive on the issues asset owners should consider when choosing climate-aware portfolio building blocks, from the evolving opportunity set to the active/passive decision.
Is there opportunity for high yield in today’s new economic era?
Is there opportunity for high yield in today’s new economic era? Portfolio Manager Konstantin Leidman explores.
No bulls in the China shop?
John Mullins, Irmak Surenkok and Steven Ye assess the investment debate surrounding China's prolonged underperformance and outline three investment ideas for active investors to consider.
URL References
Related Insights
Japan equity: Reason to believe
Continue readingBy
Toshiki Izumi, CFA, CMA