For a global bond manager, keeping an eye on currency is a key part of the job.
“Every time we’re making a decision about a bond market to invest in, we then have to make a separate yet integrated decision about the currency,” says Richard Lawrence, senior vice-president, portfolio management, at Brandywine Global Investment Management in Philadelphia, Pa. “Think of currencies as being the other aspect of risk management for a global fixed income investor.”
He assesses how currency changes can affect a country’s economy.
“If your home currency is cheapening, that can be a good thing for the economy over time,” he says, as it helps drive exports and tourism.
On the other hand, a cheaper currency also means higher import prices, which could introduce inflationary pressure: “It’s these types of feedback cycles that we spend a lot of time looking for,” says Lawrence, whose firm manages the Renaissance Global Bond Private Pool.
During his late April interview, he said emerging market currencies were looking “both cheap and improving,” but that he’s been more active in developed markets recently—taking advantage of undervalued currencies.
“We see some significant opportunities in the periphery of Europe, in currencies like the British pound, the Norwegian krone, Swedish krona [and] the Polish zloty,” he says. “We like these currencies a lot.” He’s less constructive on the euro, given continued quantitative easing by the European Central Bank.
And he says he’s avoiding the “overvalued” U.S. dollar.
“One of the key themes that’s imbedded in all of our portfolios is an underweight to the U.S. dollar,” he says. “Valuation certainly doesn’t support owning dollars.” For example, the dollar could face pressure from potentially increasing U.S. fiscal deficits. Lawrence adds that, for the Trump administration’s policies to be successful, a weaker currency is required.
Underweighting the dollar has worked well during the last six quarters or so, he explains. Despite some recent upticks, he expects the dollar to “resume its longer-term decline.”
Lawrence recently removed some U.S. and New Zealand dollars from the portfolio to take a position in Canadian dollars, a currency that’s “undervalued on a variety of our metrics.” He says he’ll periodically own Canadian dollars in his Canadian-dollar-denominated portfolio “to the extent that we’re going to see some Canadian dollar strength.” A positive for the loonie is, for example, firming oil prices in response to restricted supply.
As of May 22, according to Bank of Canada rate data, the U.S. dollar was worth CAD$1.28 while the New Zealand dollar was worth CAD$0.89. Over the last six months, the loonie has been worth US$0.79 on average, with a low of US$0.76 in mid-March and high of US$0.81 throughout early 2018.
Lawrence summarizes his position as favouring emerging market currencies as well as other undervalued global currencies. “We’re on track for a continuation of a broad-based synchronized economic expansion,” he says.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.