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 years 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. 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 dont 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.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataThe 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 Sarasins head of portfolio management, Othmar Keiser, outlines the banks approach to foreign exchange.
In fixed income securities we do not recommend taking risks generally. 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 instrument 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.
While acknowledging that the Singapore dollar has often been referred to as the safe haven currency of Asia with remarkably appealing fundamentals, 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 Banks ceiling, but it remains in the core currencies bloc and will be bid at times of eurozone deterioration, she adds.
