Email of the day (1)
"Thank you again for your excellent service and for providing insights into these extremely exciting but scary times!
"Over the last year I have held money in emerging market equities and the investments, particularly recently, have been decimated by a strengthening sterling. For example, the Bovespa has fallen 2.5% in local currency terms over the last year but by 18.9% in sterling terms. The Bovespa is now approaching its 200 day moving average which is a possible entry point to increase exposure.
"Can you give me some wise words of wisdom on how you handle currency in your investment strategy (I am a UK citizen and intend to spend my life spending sterling in the UK!) as well as what your thoughts are on investing in Brazil now that the stock market has reverted to the mean."
David Fuller's view Thank you for your kind works. We can
only deal with the reality that markets provide and the fact that you find these
times exciting indicates that you have the emotional resilience necessary to
deal with the scary aspects of analytical challenges.
Also
being a UK citizen intending to remain in England, I face similar currency challenges,
as do many of your colleagues in the Collective. Personally, I am gratified
to see some sterling strength for a change and there is usually a swings and
roundabouts aspect to the majority of currency moves.
This
monthly chart of GBP/BRL shows that
the pound is recovering from a region of previous support and although it appears
slightly overextended in the short term, there is nothing on the chart to suggest
that it will not appreciate somewhat further over the medium term. GBP/INR
has been an even bigger problem recently for those of us with investments in
India.
I wish
I could offer some "words of wisdom" on how to handle currency fluctuations
but it is not easy because we have to consider the market's attitude towards
governance in two very different countries. Obviously we want to look at charts
and probably on a longer-term basis for what I assume are often investments
intended for at least medium-term duration.
Forex
cross-rates will obviously fluctuate, although usually less than the stock markets
in question. One could hedge the currency risk in some instances although this
is not always easy with emerging markets. Hedges can also work against us. Consequently,
I usually accept the currency fluctuation which will sometimes enhance and at
other times inhibit returns in the underlying asset.
Some
counterintuitive thinking may help. If a currency has been strong for several
years, it will be fashionable but also increasingly susceptible to a medium-term
correction, and vice versa.
Currently,
there are concerns over governance in both Brazil and India, and this has weighed
on their currencies. Taking a longer-term view, once these are resolved to the
market's satisfaction, there will be plenty of reasons to look forward to a
period of BRL or INR relative strength.