Monetary manipulation is the only tool some countries have left.
“The currency war in the emerging world…has gone global,” says Vincent Lépine, vice-president of global economic strategy (asset allocation and currency management) at CIBC Asset Management. Lépine co-manages the Renaissance Optimal Inflation Opportunities Portfolio.
That’s because countries can no longer lower their interest rates to boost growth, given rates are close to zero. Governments are also finding it challenging to use fiscal policy measures to stimulate their economies due to “lousy situations on the fiscal front,” he adds.
Fighting the currency war, then, is the only option left, says Lépine. Countries don’t want to be the “one…stuck with the strongest currency. Eventually, that will affect [their] competitiveness.”
Think of the Australian dollar, which has been overvalued throughout this past year.
“If a currency is overvalued because investors have been pushing it up, it gets to be a hit on the economy,” explains Lépine. “When you reach that point, then you get a huge imbalance because the [country’s] trade deficit gets bigger.”
Eventually, he says “portfolio inflows…aren’t enough to compensate, so the currency goes back to equilibrium [by] depreciating,” which creates an opportunity for investors.
When a currency is undervalued, he adds, investors can take advantage. “If the political and economic situation justifies [the move], you’ll have a big inflow of capital coming in terms of portfolio flows, and that’ll push currencies up.”
The global economic landscape is also shifting.
China has realized it must deregulate its financial sector, finds Lépine, since its capital allocation model isn’t productive. In Europe, banks have completed their deleveraging phase, which suggests the region is poised for a turnaround after seven consecutive quarters of economic contraction.
Meanwhile, consumers in the U.S. will likely start spending again. “They’ve cleaned up their balance sheets [and] that’s another piece of good news,” says Lépine.
Managers need to identify and exploit these trends for clients, he adds. They can let investors know that economic upticks are bad for bonds, for example. Although “government bonds have done well since 2008,” explains Lépine, the current long-term outlook isn’t positive.
In contrast, spikes in global performance are good for riskier investments like global equities. U.S. equity markets, in particular, have been outperforming other global players for the past few years, but they’ll likely start to lose ground to Europe and some emerging markets, says Lépine.
If advisors are bullish on equities, he adds, they should figure out what global regions they prefer.