Manage currency short term to win long term
AMP Capital’s Nader Naeimi has raised eyebrows by recently declaring he is thinking about dumping all his US holdings, as the tariff fight between the US and China intensifies.
The head of the dynamic markets multi-asset division at the fund manager with $130 billion in assets under management says inconsistent messages from US President Donald Trump on trade are putting that money at risk.
Trump is “one guy juggling with scissors next to balloons”, he says.
“Today, he’s reversed his opinion on TPP [the Trans-Pacific Partnership]. He’s just so inconsistent,” Naeimi says. “This is the way he negotiates but at some point you just don’t want to listen to him or you just basically get out.”
The short-term political risk from Trump runs within Naeimi’s long-term structural view that the US dollar is sliding towards an eventual demise as the world’s reserve currency.
“There are two sides,” Naeimi says. “One side is the US and the high amount of debt in the US and the other side is China, with the lower savings in China and with the massive economy [but still a] small part of global markets now is starting to have an increasing influence.
“But I think that’s a long-term trend. We talk about de-dollarisation but I think medium term, over the next few years, it’s hard to deny that the US dollar is still the reserve currency of the world.”
Naeimi, who directly manages about $1.4 billion and helps oversee more than $60 billion for AMP, says even if political risk becomes so bad it leads to a global recession, the US dollar will rally again.
“We invest for five years but you have to manage short-term for long-term success,” he says. “You have to manage dynamics as they evolve. You can’t just set and forget. If you had a 30-year time horizon you could assume dollar status against renminbi was going to decline.”
Part of the US dollar’s medium-term status as the world’s reserve currency is due to much of global debt remaining in US dollars, particularly in the seven years since quantitative easing began.
“Even Chinese corporate debt in China, a lot of that is US dollar,” Naeimi says. If conditions get tight and we start getting margin calls on those loans, there will be a shortage in US dollar because a lot of those loans will have to be paid in US dollars.”
But bilateral trades in which countries trade in their own currencies, bypassing the US dollar, would continue.
“Even now, China is starting to have commodities settle in renminbi – China being one of the biggest commodity users. If you talk about a long-term trend…that’s where things will go. At some point, the Chinese currency itself will become the reserve currency of the world.”
In the meantime, Naeimi has lifted his fund’s allocation to gold from 2 per cent to 5 per cent, partly as an exposure to commodities and as an inflation hedge. He says currency strategies are under-owned by fund managers and could be used more by portfolio managers.
“There are a lot of inefficiencies in the currency market and their drivers are sometimes different to what drives equity markets. Having currency as a separate lever in a portfolio not only allows us to increase and reach our potential but also [lets us] dampen risk,” Naeimi says. “I’m quite fortunate to be managing a multi-asset portfolio that actually has currency as a separate lever.”
He says portfolio managers should broaden their view on currency investment and look at cross-currencies as an asset class to reduce portfolio risk.
“Currencies are very macro,” Naeimi says. “Super funds can manage a portfolio from a strategic asset allocation point of view but what they don’t have is macro skills. [To address this], they can partner or bring it in-house, allocate a fund manager and use it in an investment portfolio.
“As volatility increases, I think currency is a good lever to add to a portfolio,” he says.
Naeimi spoke to Investment Magazine ahead of speaking on the topic “Managing dollar pains: monetary policy, yield gaps and jawboning” at the 2018 Fiduciary Investors Symposium, to be held in the Blue Mountains, May 21-23.