A LESSON from the volatile global financial markets this year, particularly in recent weeks, has been the safe haven status of the US dollar.
Against a basket of major currencies, the greenback is trading around 20-year highs.
While equities and bonds have fallen, and crypto currencies have been dumped, investors have flocked to the US dollar, says Nudgem Richyal, co-manager of Pendal Global Select Fund.
Richyal uses a water tower analogy to describe what’s happened in financial markets in recent years.
“Financial markets are like a water tower. The US Federal Reserve has put a lot of liquidity into the system since 2008, and that’s the equivalent of filling up the water tower,” Richyal explains.
“But then there was too much liquidity in the system, or water in the tower, and the frothy stuff at the top flowed over.
“That’s the risk assets that we’ve seen come off in recent months like cryptocurrencies and speculative technology stocks.
“More recently we’ve seen a mopping up of the overflow – the excess liquidity. As the excess liquidity, or flow of water, stops, levels start to even up and that’s what’s happening now,” he says.
The disturbance in the market, or water tower, hits risky assets (or the highest water levels) most — but everything underneath is also affected.
“We are now getting to the point of last man standing, because pretty much everything has been hit,” he says.
Pendal Global Select Fund
Something very different in global equities
Richyal isn’t calling the bottom of the market.
Some sectors haven’t sold down, and they remain at risk. But it might be time to put some duration back into portfolios – stocks with long-term growth prospects, he says.
“The valuations of some duration assets have become much more attractive.
“Health care is one area we like. It is a long-term play, and usually when inflation peaks, the baton is passed from energy stocks to healthcare stocks,” Richyal says.
“Healthcare is a quality, long-duration asset, as opposed to speculative tech.”
In the meantime, investors are looking for an asset that isn’t losing value.
Risk parity – a portfolio allocation strategy that uses risk to determine asset allocation – hasn’t worked well because bonds haven’t protected investors when equities have fallen, Richyal says.
“But as both equities and bonds have fallen, the US dollar has gone up. The dollar has become a stagflation hedge.
“Another way to think about it: non-US investors might be selling equities and they might be selling bonds, but they’re not repatriating dollars.”
Richyal says it’s worth remembering crypto currencies — which have tumbled in value this year but in 2022 were considered by some investors as a hedge against inflation.
“Compare that to the US dollar, which is a risk-off currency.
“There’s a big difference. It just shows there really is only one risk-off asset in the world and it is still the US dollar.”
Nudgem Richyal co-manages Pendal Global Select Fund with Chris Lees. The pair have been working together in global equities investing for more than 20 years.
Nudgem has 22 years of industry experience, joining J O Hambro Capital Management (a wholly owned subsidiary of Pendal Group) with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.
Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach and a 17-year track record of outperformance. Since its inception, the underlying strategy (JOHCM Global Select Fund) has delivered top-decile performance in Lipper and 2nd decile in Morningstar.*
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. Pendal Group includes Pendal Australia, J O Hambro Capital Management, Regnan and Thompson, Siegel and Walmsley (TSW).
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