“Few things are brought to a successful issue by impetuous desire, but most by calm and prudent forethought.” – Thucydides
One of the major stories of the third quarter was US dollar appreciation.
Many market participants have been expecting the dollar to rise meaningfully for some time now, and in the third quarter it happened. The US economy is coming out of recession in a much more robust and timely fashion than most others and the Federal Reserve is widely anticipated to be the first big central bank to begin raising interest rates.
Earlier this year we saw the dollar show signs of improving strength, as the US wound down its quantitative easing programme, but, as with its gains against the Japanese yen, this was largely contrived by the actions of other central banks. Now we are seeing concerted dollar strengthening across the board against the euro, sterling and just about any currency you can think of. The US dollar was up almost 4% against the euro in September alone, and more than 5% against the yen and Australian dollar.
Our portfolios have been positioned for dollar strength for some time, and we are now beginning to reap the rewards of that forethought. Our bias towards US assets is a bonus for euro and sterling investors, who will have seen a stronger dollar boost returns. Despite its good run, we think the dollar is still undervalued relative to other currencies and would expect further gains in the final quarter of 2014.
It’s fair to say that many active managers have had a very difficult year so far, largely due to rotation in equity markets and the difficulty of finding sectors and names that perform consistently well. There is no proven correlation between the strength of the US dollar and the behaviour of equity markets, but there is between the dollar and commodity prices – which fall as the dollar rises. Of particular note are oil prices, which have dropped significantly during the third quarter, the equivalent of a tax cut to our oil dependent industrialised economies.
It is to be hoped that this will be enough to encourage economic growth, especially in the small and mid-cap space, giving active managers something to get their teeth into as we look towards the end of the year.
Rupert Howard Senior Portfolio Manager, Managing Director