I remember John Cleese who in spite of not being a fan of the party promoting Brexit was stressing the fact that we just don't know the long-term consequences. So it's true that the GBP lost a lot overnight but who knows what will happen in the long term. Is a top down control and bureaucracy risking to stifle freedom better than perhaps too much laissez faire? I just don't know, I guess it's Plato versus Aristotle in a sense...Speaking as a UK resident, the German mentality cracks me up.According to strict investment theory, you should have the risk-free part of your portfolio in your home currency.Yes I ment that Bonds should provide ballast.
I thought that this would be better achieved if I have a currency unhedged fund because for example if there is a crisis and the Euro goes down a lot for example due to some political changes and world markets drop, then if I rebalance into the s&p 500 from a hedged fund to euros I would have much less purchasing power than from an unhedged fund (where the US bonds would presumably have gone up when US stocks have gone down or at least being in the same currency wouldn't have had a drop due to a weakening euro, which would have been the case if I had hedged).
Of course this can work the other way as well and the Euro could strengthen but what I mean is that it seems that an unhedged seems naturally suited to provide rebalance to a unhedged world stock fund. I don't know if this makes sense?
US citizens have it easy here. Their home currency is the world's safe haven currency, so they never think for a moment that they should use another currency here.
A Swedish investor who followed the strict theory and invested the bond portion in Swedish krona had to watch as the Swedish krona depreciated by 50% against the USD and 30% against the euro in the last seven years. And there was no compensation through higher interest rates. Inflation in Sweden was about the same as in the Eurozone.
Because of this currency risk, there are also people who say that, for example, in a 60/40 portfolio, having 40% of your assets in one currency is a major cluster risk.
However, there are certainly investors in the Eurozone who are Euro-skeptics. A well-known financial advisor from Germany (Gerd Kommer) has designed a bond portfolio for such Eurosceptics. It consists of 33% USD bonds, 33% GBP bonds, 33% CHF bonds.
The British Pound safer than the Euro? Well not the last 8 years*. Why do we think the damage Brexit has done is over now?
It is true we might be headed for a period of stability in government, and caution. That's certainly what the combination of the polls and the personalities say. We'll know on July 5th. And there is the long term fiscal rectitude of the British State. But no one who went the gyrations of the bond market crash accompanying the abortive 49 day premiership thinks that our stability is guaranteed. A future minority government? Definitely not so if you start mapping the possibly coalitions (which involve nationalist parties or religious sectarian ones).
Maybe I am too pessimistic. In honesty, I don't think the solvency of UK government debt is ever really in doubt. However the GBP? That's more difficult.
Maybe the problem with the Euro is the rise of nationalist parties in different states. But Italy so far it has not disrupted the thing noticeably.
Sweden suffers/ benefits from being a small currency in a country attached to a big currency zone. A bit like Canada. The flexibility of the exchange rate reduces the pain of internal adjustment to changes in the terms of trade/ competitiveness. I shudder to think what would have happened to Canada and Sweden in the early 1990s, during their respective property crashes, if their currencies had not been floating.** Downside is it's also volatile.
* to be fair, not since the Global Financial Crisis of 2008
** one might see that as what happened to Greece. Although in fact Ireland or Spain might be a better example. Being in a common currency when your domestic economy has a bubble bust is brutal (technically speaking: rather than a nominal exchange rate move, you have to have an adjustment in the real economy - a downward movement in real wages & relative prices. Because of nominal wage and price rigidity (they tend not to fall below 0, ie you don't get negative movements) that tends to be really painful in terms of unemployment and economic growth. Greece has just been through that - something like a 25% fall in GDP over 3-4 years.
Statistics: Posted by Francesco — Fri Jun 28, 2024 7:29 am — Replies 15 — Views 2919