FX rates – Page 2 – Harlyn Research LLP

Time to Separate China from EM

Friday, August 13th, 2021

EM ex China has begun an interesting rally

We think it is time to take China out of the main EM equity indices. Some of the arguments made for its inclusion are no longer valid. It doesn’t make sense to have separate benchmarks for companies listed in China and Hong Kong. Separate indices for China plus Hong Kong and the rest of Emerging Markets would increase flexibility for all investors, not just those who no longer wish to have passive exposure to the current regime in China. Once we make the split, we can see that EM ex China has already begun an interesting rally.

Filed under: Categories: China, Diversification, Emerging Markets, ESG, FX rates

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Two Red Flags from China

Friday, August 21st, 2020

Cause for concern in Technology and Financials

China’s stock market is always subject to official intervention, so the signals need to be interpreted carefully. However, there are two new red flags in our equity sector model, relating to Technology and Financials. Technology has suddenly started to deteriorate, which has historically been a good lead indicator for the US Tech sector. Financials are heading for a multi-year low relative to the index, which could have important implications for China’s FX policy regime.

Filed under: Categories: China, Financials, FX rates, Technology, United States

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Income in Dollars, Please

Friday, April 17th, 2020

Time to look at European Energy equities

Generating an adequate income from euro-denominated bonds is next to impossible, so investors should abandon the attempt. They should embrace currency risk – not try to hedge it away. They should enjoy the fact that US dollar yields are structurally higher than those in the Eurozone. This means owning long-dated Treasuries and dollar-denominated EM sovereign bonds. Finally, they should consider the source currency of their equity dividends and take another look at the Energy sector.

Filed under: Categories: Corporate Bonds, Dividends, Energy Prices, Eurozone Crisis, FX rates, Government Bonds, Tail Risk

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Show Me the Damage

Thursday, May 16th, 2019

EM equity weakness may cause FX volatility to surge

So far, most of the damage inflicted by US/China trade tensions has been on EM Equities. Our models suggest they peaked over a month ago and there is no support until we get well into underweight territory. The danger is that equity weakness turns into FX volatility, affecting EMs and DMs. We know this is always dangerous for risk assets in general.

Filed under: Categories: China, Emerging Markets, FX rates, United States, Volatility

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Almighty dollar

Wednesday, September 12th, 2018

Currency models don’t help with asset allocation

Many clients are surprised by our low exposure to US Equities given the strong dollar and their performance relative to global equities. It’s a direct consequence of the way we structure our asset allocation model. We could use a currency-based rather than an asset-class approach, but it doesn’t perform as well over the long-term and it doesn’t offer as much downside protection in the event of a correction. In any case, the risk-adjusted returns from US Equities have been bit underwhelming in 2018 to date.

Filed under: Categories: FX rates, Harlyn's Process, Risk-Adjusted Returns

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Europe Can Set the Agenda

Wednesday, August 1st, 2018

EM assets are already attractive in euros

Because of the strong dollar, European investors have a chance to buy emerging market exposure without competition from US investors. EM Bonds already offer attractive risk- adjusted returns when measured in euros or pounds. There may also be an opportunity in selected equity markets like Mexico, India and Israel, even if the overall index is unattractive because of its large exposure to China and the threat of a trade war.

Filed under: Categories: Emerging Markets, Equities, FX rates, Government Bonds

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Red Flags

Wednesday, July 4th, 2018

Emerging Markets, the Renminbi & Eurozone Banks

Our recommended underweights for Eurozone Financials and EM Equities are at the sort of levels we saw just before major crises such as 2008 and 2010-12. We think that both can be traced back to tightening financial conditions and restricted dollar liquidity. What concerns us is that neither the Fed and the ECB are prepared to admit there may be a problem or that these two themes could feed off each other. We also worry that further devaluation of the Chinese renminbi could put additional pressure on EM Equities and bring a potential flashpoint closer.

Filed under: Categories: China, Emerging Markets, Eurozone, FX rates, Global Equities

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Selectively Europe

Wednesday, April 18th, 2018

It’s still a relative call

By the time equities regain traction relative to fixed income, we believe Europe will provide the leaders. The main reasons are abnormally low volatility compared with the US and global equities and the ongoing stabilisation of the trade-weighted dollar index. Our preferred countries are the UK, France and the Netherlands. It is too early for Germany and Spain, and maybe too late for Italy. Avoid Switzerland, Sweden and Austria.

Filed under: Categories: Eurozone, FX rates, United Kingdom, Volatility

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Actions Speak Louder than Words

Wednesday, October 4th, 2017

Investors are positioning for more dollar strength

Across a broad spread of asset classes and strategies, investors have responded to recent dollar strength by putting on a series of trades which suggest they expect it to continue. This doesn’t prove that it will, but the market reaction has been consistent and immediate.

Filed under: Categories: China, Commodities, Emerging Markets, Eurozone, FX rates

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Untangling the Currency Effect

Wednesday, September 13th, 2017

Risk-appetite set to decline unless dollar recovers

What would happen to investors’ risk appetite if global currency markets stabilised at their current levels? In our view, the cumulative shock from the weak dollar has already reduced the recommended allocation to equities for most developed markets. This includes the US, though not by very much. The only way to avoid further reductions is for the dollar to retrace some its losses. If all major currencies stay where they are, risk appetite in most countries is likely to trend lower. The only significant exception is China.

Filed under: Categories: China, FX rates, Global Equities, Risk aversion

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