The growth of global
investing has driven private clients to consider the merits of
holding assets outside their traditional base currencies. Paul
Golden speaks to four private banks and finds there is still
significant uncertainty surrounding the merits of clients moving
into ‘alternative’ currencies
The rise of strong
economies outside Western Europe and the US is leading more
sophisticated private banking clients to consider holding an
increasing proportion of the wealth in ‘alternative’ currencies
including renminbi and the Canadian, Australian and Singapore
dollar. But what do banks think about the future of these
alternatives?
Go deeper with GlobalData
While most private
banking clients will prefer to focus on their local currency, more
sophisticated customers are devising their own currency
baskets.
That is the view of
Robert Farago, head of asset allocation at Schroders Private
Banking, who explains that time frame and level of risk will
determine the appropriate strategy.
“Current thinking is that
the dollar is this year’s defensive currency, but looking to 2013
the dollar will have its own challenges, with the US presidential
elections taking place late this year,” he says.
There is clear
undervaluation in the developing world, but Schroders expects that
to disperse over the next decade, Farago adds.
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By GlobalData“The Singapore dollar
makes sense as a safe haven currency for the future given that
Singapore is a well-managed economy and banking system. However, we
don’t see a trend towards the renminbi becoming a world reserve
currency.”
Didier Duret, chief
investment officer at ABN Amro Private Banking, says recent
progress towards avoiding a systemic debt crisis has reduced the
necessity to hedge for clients that were sensitive to that
risk.
Although there has been
more openness to international diversification, for instance in
Nordic currencies.
“The asset allocation we
propose includes a significant exposure to foreign equities that
are not currency hedged. The recommended fixed income exposure is
essentially in domestic currencies because the currency volatility
is not rewarded by sufficiently higher yields. Keeping the
portfolio within controllable risk boundaries is the
rationale.”
When asked whether
increased demand for investments in emerging markets will encourage
clients to move some of their cash holdings into renminbi or
Singapore dollars, Duret observes that while private clients are
acknowledging that the Chinese currency will have a more
internationalised market, they are also admitting that this process
is slow.
“Asian clients are
naturally more open to this development,” he says.
“For most private
clients, exposure outside their base currency remains driven by an
interest in assets and not by a pure currency exposure.”
While Swiss private bank
Bank Sarasin advises international on diversification, some of its
clients switched all their assets to Swiss francs during the euro
crisis of August 2011 “to protect their purchasing power”, observes
chief strategist Philipp Baertschi.
Bank Sarasin’s head of
portfolio management, Othmar Keiser, outlines the bank’s approach
to foreign exchange.
“In fixed income
securities we do not recommend taking risks generally,” he
says.
“We assume performance
advantages of interest rates are being evaporated by currency
fluctuations in the long run, although short-term investments (or
currency hedges) and investments in emerging currencies might be
beneficial for overall portfolio risk management,” he says.
Asian shift some
way off
Baertschi and Keiser agree
that any major shift towards the Chinese or Singaporean currencies
is some way off.
“The renminbi in
particular is not freely tradable and the Singapore dollar is quite
a small currency in terms of trading volume.”
“US and European clients
can usually access diversified emerging markets instruments via
dollar or euro.”
In terms of recent
trends, Audrey Childe-Freeman, global head of currency strategy at
JP Morgan Private Bank, refers to the Swiss franc having become
much less of a one way upward trade than it was this time last year
as a result of the maximum exchange rate imposed in September 2011
and mounting deflationary forces.
She describes currency
diversification as an appealing way to get exposure to countries on
which JP Morgan has long term, structurally bullish economic
views.
“We believe in the long
term Asia story and currency diversification is a good way to
implement that view. In particular, notwithstanding a more
symmetric trading outlook for the next three to six months, we are
also of the view that the renminbi will pursue its gradual
appreciation trend of the past few months.”
Childe-Freeman adds that
“one of our very few reservations on the Singapore dollar safe
haven argument relates to the relatively small size of its market,
implying a potential lack of liquidity at times of market
stress”.
She concludes that
irrespective of domestic cyclical considerations, the dollar, euro,
sterling and Swiss franc remain the core currencies in most
currency diversification strategies.
“You still want to hold
the dollar for its ultimate safe haven status, the euro for its
highly liquid virtues and sterling for its highly liquid virtues
and as a way of maintaining exposure to Europe without suffering
any eurozone existentialist jitter.
“The Swiss franc has
become more ‘of a special case’ considering the Swiss National
Bank’s ceiling, but it remains in the core currencies bloc and will
be bid at times of eurozone deterioration,” she adds.
