Active Investing: Managing Global Currency Forecasts

Our firm’s newly released 2016 Annual Global Market Outlook offers important directional guidance on global markets and our portfolio management team uses this guidance in the real world of investing. To help illustrate how we leverage it, let’s first put our strategists’ latest thinking regarding the global currency markets under a portfolio-manager microscope.

Here is a quick summary of the report’s main conclusions regarding global currency:

  • The U.S. dollar (USD) appears to be entering the mature phase of its cyclical bull market, which is likely to end before the second half of 2016.
  • Sometime in 2016, we anticipate the start of a multi-year period of emerging markets currency outperformance.
  • Central bank disparity will likely continue. The U.S. Federal Reserve (Fed) will probably continue raising interest rates, while other major central banks will maintain an easing policy or will stand pat.

Applying the forecast lens to our work

From a portfolio management perspective, while we rely on our strategists’ global currency forecasts, we also dive deeper and mix in additional research from our sub-advisors and third party research to get a detailed view that will apply to the different portfolios we manage. Instead of looking broadly at the trends for the USD, or any other currency, we’ll be looking at specific currency pairings and make micro-judgements based on those pairings to help balance a portfolio to meet client or portfolio goals. For example, we might find compelling investment opportunities due to an overvaluation or an undervaluation of a specific currency versus the USD that, when paired with the potential risk, still suits a particular portfolio goal for currency exposure as part of our multi-asset total portfolio management approach.

Separating asset views

Our portfolio team also separates our strategists’ currency views from their views regarding specific assets, such as stocks or bonds. For example, we wouldn’t like or dislike European equities based on our just released 2016 outlook for the euro (EUR). Rather, we separate the currency and stock decisions and make them independently. The forecasted state of the EUR is just one input that we’ll be using when we weigh European investments. As a result, our investment decision might include a currency hedge, when warranted to help meet a specific client goal, based on the strategists forecast and our other information.

The Mercedes effect

From our investment management view, both the appreciation and the depreciation of a currency provides specific opportunities. For example, during periods of depreciation for European goods and services, U.S. consumers can benefit. Travel is less expensive and exports are cheaper—that Mercedes-Benz® becomes a relative bargain. Consequently, travel companies and product exporters could experience a boost in profits, which creates company-specific investment opportunities. Similarly, as the USD may continue to appreciate against an emerging market currency it could make U.S. exports more expensive in other countries and hurt some U.S. companies’ profits and therefore their potential stock appreciation.

The active-management mosaic

Our investment management team’s job is to build portfolios designed to reach our clients’ desired outcomes, which vary depending on the specific client’s circumstances. Our internal strategists help our investment team accomplish this goal, and as part of an active management process, we are constantly evaluating the entire picture before we make decisions. And luckily, we have the advantage of consulting our investment strategists daily for ongoing and updated insights.

For our latest forecast, you can download a full copy of the 2016 Annual Global Market Outlook here.


Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Russell Investments is the owner of the trademarks, service marks and copyrights related to its indexes.

Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is a subsidiary of London Stock Exchange Group.

Copyright © Russell Investments 2016. All rights reserved.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

UNI – 10675

© Russell Investments

Read more commentaries by Russell Investments