Investors have grappled with the question of currency allocation this year, triggered by the sharp depreciation of the dollar against most major currencies. While a sharp currency move is understandably a source of concern, we think it is important for investors to think about the various underlying questions before considering portfolio reallocations to reflect views on particular currencies. 

In early March, we wrote a note highlighting the uncertainties and complexities arising from the Trump Administration’s trade policy intentions. Based on our analysis we increased our overweight to fixed income by reducing equities.

Since we established Parkview in 2011, we have often debated whether we should include gold in our standard asset allocation. We have not done so. I have always taken the view that because gold is an asset that does not generate a return, it is not possible to value it with any degree of consistency. Nonetheless, we recognise that gold has a special place in the imagination of some investors. For investors who have a very strong conviction for such an allocation, we have accommodated their requests.  

I try to avoid writing about currencies. This isn’t because I find them uninteresting. Rather, it is because most currency discussions invariably involve taking a directional view.  Anyone familiar with exchange rate models, or the track record of professional forecasters, would appreciate that this is a fool’s errand. However, we are at a moment in the history of the international financial system when a discussion about the future of the dollar cannot be dismissed.

The US economy has entered a period of heightened economic policy uncertainty.  Significant policy changes were anticipated under the Trump administration. This includes trade protectionism, finding ways to reduce government expenditure, and delivering on tax reductions in the next budget. All of these policy areas are being tackled. However, the manner in which policy is being conducted exposes businesses to considerable uncertainty. This is happening at a time when some indicators of real economic activity have weakened considerably.

The past year has been one of positive surprises. Inflationary pressures were brought under control in most countries. US economic growth remained strong, exceeding most forecasts.  Equities and credit performed well.   

As we head towards a very consequential US election next month, we are balancing our positioning between two opposing forces. The first is the strength of recent economic data. The second is the inevitable uncertainty that comes with a change in policies.

This year has been remarkable in many respects. Economic growth in the US and parts of Europe exceeded expectations. US Inflation – which had been accelerating – appears to have resumed  its downward trend. Inflationary pressures in Europe have subsided sufficiently for some central banks to have started their easing cycles. Equity markets have reflected these favourable developments.