The question of currencies is at the forefront of many active investors’ minds. Indeed, the US dollar, the euro and sterling all seem to compete in turn for designation as the weakest currency. The dollar is undermined by yet more quantitative easing – this time apparently unlimited, the euro is beset by political paralysis and the threat of a break-up, and Sterling carries many of both the dollar’s and the euro’s unattractive traits. The alternatives to these three have their own problems; the yen looks pricey and Japan’s debt levels are at a record high; in China, the authorities no longer seem to want the yuan to appreciate, and in any case western investors are extremely nervous of the Chinese economic slowdown; in Switzerland the central bank is determined to stop its currency from appreciating; and in Australia interest rates are falling and there are question marks about the continuation of the mining boom.
The president of the Bundesbank has recently equated the additional monetary stimuli that central banks around the world have embarked upon during the last quarter to Faust’s Mephistopheles (the devil) urging the emperor to abandon gold, print money and be damned. The recent strength of gold relative to all fiat money is telling.
Indeed the outlook for commodities as a whole is an interesting case. The major factor behind the bull market in metals prices, namely a massive Chinese infrastructure spend, is firmly on the wane. Not only is the Chinese economy slowing down as it matures, but the engine of growth is shifting away from fixed asset investment towards consumer spending. While the forthcoming new leadership in China may in the short term boost infrastructure spend to get the economy moving again, and other parts of Asia (e.g. India) will in time take up the reins from China, the fact remains that the big step change in demand for metals is probably behind us. There will always be opportunities in the commodity sector, but investors will need to be extremely vigilant to the threat of oversupply (e.g. of iron ore).
The transition in China from a high growth emerging market to one of the world’s leading economies is not without its problems, and this will have implications across the asset classes. We remain, optimistic on the ASEAN countries – chiefly Singapore, Thailand, Malaysia and the Philippines. These countries learnt a number of lessons in the crisis of the late 1990s and as a result now have good fundamentals, sound finances and strong currencies. Markets there have already greatly outperformed China and do not look particularly cheap, but the ASEAN economies are likely to be an enduring theme and, one hopes, a source of profit in the coming years.
Algernon Percy is head of private client business at JO Hambro Investment Management.