Within investment markets, there is often much talk about trends, momentum, and inflection points. Hindsight will confirm this in due course, but a series of potential inflection points may be occurring, the peak in US inflation, the end of negative rates, the market low for equities, and the end of dollar strength.
Whilst not making any predictions of our own, much of the above is likely to be positive for multi-asset investors. However, currency movements are always an important consideration within our process, with the Euro vs USD being the key rate. The global stock market is approximately 70% in the US, with the Hong Kong dollar pegged to the US dollar. Include currencies heavily influenced by commodity prices (CAD & AUD) and you have at least three of every four companies listed around the globe explicitly affected by the movements of the greenback.
For those who keep a keen eye on the local vs Euro currency returns in the table below, you’ll know that the strengthening US dollar (from 1.14 to below parity this year) has insulated Irish investors from the worst of the falls in equities so far this year. However, this trend has reversed somewhat in the last two weeks. For example, global equities were positive last week in local terms, but negative in Euro terms. As per the above, time will tell whether this is an inflection point or just a short term movement. However, the key point here is that currencies matter in investing – and should matter to your investment manager.
As always, if you wish to discuss anything in this newsletter in further detail, please do get in touch.