InFocus: Global Macro 2.0

Why do investors ignore the world's largest asset class?

Why do investors ignore the world's largest asset class?

Currencies are chronically overlooked by most Canadian investors. Despite being the largest and most liquid asset class in the world, the majority of investors are ignoring currencies and missing out on the opportunities presented. All of this begs one question, why?

According to Tyler Mordy, President and CIO at Forstrong Global, investors’ willingness to overlook currencies can be attributed to one major factor: a massive knowledge gap.

“While most investors understand the role that stocks, bonds and even commodities play in a portfolio, currencies remain opaque,” Mordy says. “Yet, in a globalized world, currency exposures are having an outsized impact on portfolio returns.”

Currencies provide crucial diversification exposures for client portfolios particularly in periods of crisis, such as 2008. While all other classes tended to be closely correlated during what was an immensely difficult time, the currency market was the one notable exception. It was during that period that Mordy and his team discovered some lucrative exposures in Asian currencies.

Just as some investors avoid equity and bond investments in emerging markets, many view currency as an additional source of risk and volatility and it is common practice to hedge foreign currency exposures back to a portfolio’s base currency.

“We take completely different view,” Mordy says. “We think that not embracing global investing opens investors up to further risks. So, currency analysis is an integral part of our investment management process. Exchange rate fluctuations can have a sizable influence on an economy’s competitiveness, trade balance and inflation rate. Understanding the interconnectivity between currency and the real economy and formulating an informed view is thus a critical component in the analysis of all asset classes.”

In the current currency market, the US dollar continues to be an investor favourite. The greenback has gained in strength since the financial crisis and has been bolstered by the introduction of protectionist measures, which have been ramped up this year. Sentiment toward the US dollar is ultra-bullish but, for Mordy, it remains overvalued for a number of reasons.

“Currencies are very much like stocks and bonds, they can become wildly overvalued and undervalued and the US dollar is over on both,” Mordy says. “That doesn’t bode well for longer term returns. For us, emerging market currencies represent a deep value play right now but nobody wants to have anything to do with them. For me, that indicates an opportunity.”

A large opportunity clearly exists for active currency management and Mordy believes it’s unrealistic for advisors to be expected to learn the ins and outs of currency markets and trading. “I suggest outsourcing that expertise to an experienced global money manager with a team of people that can identify currencies around the world that are suitably valued and not widely recognized,” he says.

 

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Founded in 2001, Forstrong Global Asset Management Inc. manages money on behalf of individuals, financial professionals and institutions. Our multi-asset global macro thematic approach has demonstrated the ability to safely steward client assets through challenging markets and economic environments. Forstrong is part of the Industrial Alliance Insurance and Financial Services Inc. (TSE: IAG) family of wealth management companies, which together serve over $100B in client assets.