Currency swings and commodity slumps — investment strategy update February 2015

Shaun Port

read 2 min

2015 has been quite a dramatic year so far. We have seen some exceptional movements — both up and down — across currencies, commodities, bonds and equities.

Nutmeg portfolios gained between 1% and 3% in January, so despite a lot of big swings it has been a good start to the year.

Commodities and currencies fluctuate

The oil price lost another 9% in January and copper fell 13%, but the market is getting used to these big commodity price changes. More spectacular were the moves in currencies this month.

The Swiss Franc, which has always been pegged to the Euro, has seen a very dramatic shift. Because of the amount of money flowing out of Europe and into so-called ‘safe-havens’ such as the CHF, the Swiss have been unable to stop their currency appreciating.

In January the Swiss Franc jumped 30% in a matter of minutes, but is now around 12% stronger against the euro and 9% against the pound. In Denmark they have had similar currency woes – interest rates are in negative territory at minus half a percent, meaning that some in Denmark are actually being paid by the bank to have a mortgage.

These currency moves were particularly driven by expectations that the European Central Bank would pump money into the European economy – called quantitiative easing (QE), similar to the Bank of England a few years ago.  On 22 January the Bank announced a plan to inject €1.1 trillion into the economy over the next 18 months – double what was expected and about £2,500 per person in the Eurozone.

So what does QE mean for portfolios?

QE is no silver bullet, but it has worked in the UK and US economies.  QE will pump money into bond and equity markets, which is good news for investors.  Also, we think the European economy will produce some positive surprises this year – growth will bounce back, particularly helped by the weak currency and lower commodity prices.

The QE announcement has also helped fend off the uncertainty over whether Greece will remain in the euro, which has been welcomed by markets.

The risks of the political situation in Greece

We don’t hold any investments in Greece – either stocks or bonds. The Greek situation is dire and there will be quite at stand off over the next few months. We still think a compromise will be found to keep Greece in the euro but even if Greece leaves the euro, QE is a bigger force in driving markets – the Greek economy is only about 1% of the Eurozone as a whole.

Changes to Nutmeg portfolios

After a good bounce in the first week of February due to a slight rebound in oil prices, we have reduced our holdings in a fund tracking the FTSE 100 yet further.  Looking through the vast array of possible election outcomes, we expect there to be a coalition government in power after the general election May. Whichever way the election goes, none of the outcomes particularly helpful for UK investors.

We’ve upped our allocation to stocks in Japan and Europe where QE is stepping up, but with funds which eliminate currency risk because the Yen and the euro will weaken further. We’ve also sold some company bonds after a recent good run.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past or future performance indicators are not a reliable indicator of future performance.

Shaun Port
Shaun is the chief investment officer at Nutmeg. He has over 25 years’ experience developing and implementing investment strategies for clients ranging from central banks to pension schemes to charities and private individuals. Shaun holds a degree in Mathematical Economics from the University of Birmingham and is a Chartered Alternative Investment Analyst. He can be found tweeting @ShaunPort.

Other posts by