Why we see geopolitical uncertainty as an investment opportunity
In a recent survey of self-directed and SMSF investors, AMP Capital found that geopolitical risk was one of the biggest concerns and is resulting in investors keeping an average of $110k in cash – money that they would otherwise have invested^.
In a low-interest rate environment, many are missing out by staying on the sidelines. However, we see this rise in global uncertainty as an investment opportunity.
Geopolitical concerns on the rise
It’s no secret that geopolitical concerns are on the rise, driven by a number of factors, including frustration with the slow pace of economic recovery post the GFC. With events like the tensions between North Korea and the US, Brexit, and Donald Trump’s election as US President, dominating world news reporting, the concerns have become top of mind for many investors. More recently, we’re seeing political uncertainty in Italy, Turkey, and Spain, and the renewed prospect of trade wars.
Navigating uncertainty with active currency management
While this uncertainty remains a concern, we also see this as an opportunity and use active currency management as an additional lever within the AMP Capital Dynamic Markets Fund (Hedge Fund) (ASX:DMKT). We use the FX basket to provide a hedge against equity market risk and to help reduce overall portfolio risk.
We do this by ideally starting from a fully hedged position to separate the decision of investing in international securities from the currency impact. Currency positions are not based on forecasting currency moves, rather based on several drivers of currency markets within a risk and reward framework. The drivers include several contrarian and fundamental or cyclical drivers known to impact currency markets. On the contrarian side, measures of valuation and investor sentiment are used - extreme readings for these measures are useful indications of turning points. On the fundamental side, real interest rate differentials as well as trends in commodity prices are used.
Finding safe havens
Taking the month of May as an example, we delivered a positive return and DMKT outperformed its objective, primarily driven by its FX basket. The basket consisted of long safe haven currencies such as Japanese Yen, Swiss Franc and US dollar against the Euro and Emerging Market currencies including the Turkish Lira, which provided an effective hedge as tensions rose. Additionally, we reduced the long exposure to the US dollar following its solid run over the past 2 months as sentiment towards the US dollar swung from extreme pessimism to extreme optimism.
With a dynamic asset allocation strategy, we can be nimble and find investment opportunities in places that others may not, navigating market ups and downs. Active currency management is a great example of this, retaining exposure to markets’ upsides whilst seeking to minimise the downside. It’s important to note however that all investments include risks, which currency management can help reduce, but not completely eliminate.
^Based on responses of 679 investors surveyed in December 2017
Important note: This email has been prepared by AMP Capital Investors Ltd (ABN 59 001 777 591, AFSL 232497) ("AMP Capital"). BetaShares Capital Ltd (ACN 139 566 868, AFSL 341181 ("BetaShares")) is the responsible entity and the issuer of units in the AMP CAPITAL DYNAMIC MARKETS FUND (HEDGE FUND) (the “Fund”). AMP Capital is the investment manager of the Fund and has been appointed by the responsible entity to provide investment management and associated services in respect of the Fund. Investors should consider the Product Disclosure Statements (PDS) for the Fund before making any decision regarding the Fund. The PDS contains important information about investing in the Fund and it is important investors read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. Neither BetaShares, AMP Capital, nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document.
Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this email, neither BetaShares nor AMP Capital makes any representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. This email has been prepared for the purpose of providing general information, without taking account of any particular investor's objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information in this email, and seek professional advice, having regard to their objectives, financial situation and needs.
Sam was appointed to his current position in August 2012. He focuses on portfolio management and investment analysis supporting AMP Capital’s asset allocation capability and products, with a particular focus on the Dynamic Markets Fund