Our Perspective.
In three weeks, the leaders of the New World will gather in South Africa for what will be the 15th BRICS summit. Discussions surrounding an alternative to the US-Dollar-standard will be top of mind for attendees, pundits and speculators alike. Whilst the de-dollarisation of the global economy continues to garner attention and debate, two essential questions need to be answered first: are global participants willing to move away from the USD-standard, and second: do they have the ability to do so? If a proposal to a New World Order is to come to the fore, it will have to capture two systems:
- Global trade, and
- FX reserves.
As our CIO wrote in a recent article published in investment week, whilst market participants may express a desire to transition to an alternative, the stark reality is that no viable substitute currently exists. Speculation about the possibility of the BRICS countries establishing a new alternative currency backed by commodities, most likely gold, has captured headlines. Nonetheless, the truth is that implementing the necessary infrastructure to facilitate such a shift would require years of cooperation and development, both of which have yet to be set into motion. Whilst it is not inconceivable for the US Dollar to eventually decline, the likelihood of this occurring in the near term is probably overstated.
However, at the end of July, an announcement from the largest owner of US Treasuries, namely Japan, increased bets for a continued decline of the Greenback. Changes in YCC might result in the mother-of-all-repatriations, as Japanese owners sell foreign bonds and cash assets with the prospects of more attractive local yields.
How this will play out, is yet to be seen. But currency factors are becoming ever more important, seen by a recent rise in FX-volatility. We believe the Japanese Yen provides very attractive optionality alongside traditional safe-haven characteristics. With Japanese equities still undervalued despite a strong rally YTD, remaining long Japanese equities, unhedged, through an active manager that can exploit opportunities resulting from ongoing corporate governance reform, is a no-brainer in our opinion, so is an active view on currency exposures!
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