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John Chatfeild-Roberts: Another year of currency calls

Ongoing quantitative easing in a number of regions will likely depreciate their currencies.

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For those that believe in mean reversion, January was a prime example. Global equity markets, which had struggled to make much headway in 2014, posted decent returns for the month, whereas last year’s star performer, the US market, fell in dollar terms. Many market strategists believe that January sets the trend for the year. Whether this holds true in 2015 only time will tell.

One thing that does not appear to be mean reverting (not yet anyway) is the size of central bank balance sheets. The US Federal Reserve may have tapered its monthly quantitative easing down to zero in September but others have taken on the QE baton. The early running was made by Japan, which boosted its efforts in October. Then in January, European Central Bank president Mario Draghi surprised markets by announcing a larger than expected QE programme, committing to purchase €60bn per month of predominantly sovereign bonds until at least September of 2016, or when inflation came close to the target of just below 2 per cent. Given the tepid growth in the eurozone over recent years and the experiences of QE elsewhere in the world, the ECB may need to run its printing presses well beyond its target date. 

That said, it must be noted that this outright QE is in addition to the numerous policy measures the ECB has taken in recent years and months: for example, holding its deposit rate in negative territory.

This has already forced corporate treasurers and other cash investors out of true cash and into the perceived safer end of the sovereign bond world, depressing yields and driving many bonds into negative territory, meaning some investors are happy to lose money on these investments just to ensure safe receipt of their capital in the future (though of course this is never guaranteed). This has the potential to have something of a domino effect, driving investors into riskier assets in search of more attractive yields, which in turn bumps others into higher risk assets. This dynamic will only be further exacerbated by the ECB entering the market, buying up low-risk bonds, resulting in this combination of its policies potentially having a material impact on risk asset prices.

That is the theory anyway but in practice spanners can all too easily be thrown into the works. A potential one was the election of the far left Syriza party in Greece. It should probably come as no surprise that a country where GDP has fallen 25 per cent is looking for an escape from the status quo – but one has to hope it does not follow through on some of its more extreme policies.

Europe has by no means been alone in its loosening of monetary policy. Others include Singapore, Denmark, Canada, India, Turkey, Egypt, Romania, Peru, Albania, Uzbekistan, Pakistan and Switzerland. The latter sent shock waves through global markets by dropping its peg to the euro in January: the Swiss franc appreciated against the euro by 25 per cent in short order before falling back somewhat.

Currency market dynamics were an area of material moves in 2014, and 2015 looks like it could see more of the same. We continue to hedge the majority of our direct euro and yen exposure within the Jupiter Merlin portfolios, as we envisage the ongoing QE taking place in these regions as likely to depreciate their currencies.

As always, cases can be made for market pullbacks or further market momentum. Top of the concerns’ list has to be the conflict in Ukraine and the continuing impact of sanctions on Russia. However, short of geopolitical deterioration, we remain buoyed by the impact of low energy prices for the global consumer, coordinated stimulus from Japan and Europe, and an improving employment picture in the US and UK. We continue to believe that well selected equities offer investors an attractive risk-return proposition over the medium term and that talented fund managers have the potential to outperform.

John Chatfeild-Roberts is chief investment officer at Jupiter Asset Management 

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