Paddy Power* is offering 3/10 that Greece will be the first country to withdraw from the eurozone by 30 December 2012. This compares with odds of 7/1 for Portugal, 8/1 for Ireland and 12/1 for Italy, Germany and Spain.
The bottom line is the euro is under siege. We all know currency dealers will not leave this baby alone for a second and it’s incumbent upon advisers to gauge just how wide a discrepancy the euro will move against a client’s base currencies not just over a year’s forecast, but on a monthly, weekly sometimes daily basis if a client is coming to the end of an investment term.
Taking recent currency movements into account, it’s not going to be easy. In the short space of a few weeks we have recently seen the euro drop to its lowest rate against the dollar in 16 months and an 11 year low against the yen. The beneficiary was sterling which rose to its highest level against the euro for 15 months. Mad dashes to safe haven currencies are adding to the complex twists and turns, as we have seen with the imposition of a strict cap on the Swiss franc’s relentless rise in the second half of 2011.
Even after the euro storm dies down, the trend for investors to increase allocation to international equities – and the resultant currency risk – is not going to dissipate. In fact, it is likely to increase as clients look to emerging markets for growth as developed markets stagnate. Political events also play their part as those with clients reliant upon the Iranian rial know following a 10% fall in the currency’s value in early January as Obama moved to tighten financial sanctions against Iran.
Dig deep
In short, globalisation means advisers need more than ever to be on top of the impact currencies have. It means monitoring clients’ portfolios so that any major movements in exchange rates which have the potential to dramatically affect returns are accounted for and any resultant short, medium and long term action plans put in place.
In order to achieve this, advisers will increasingly have to dig deep into their investment tool box to ensure investment plans are nimble and flexible enough to move quickly when required and establish there is enough diversification and structures in place that hedge out any adverse currency movements, as much as possible.
The odds on any of us eliminating currency risk totally are pretty slim. But the chance of advisers adding value to international clients by using our skills to minimise currency risk is much higher. Now that’s a bet I’d take.
David Howell is chief executive of Guardian Wealth Management
