See the latest Australian dollar analysis here:
At the MBFund we often use currencies as hedges and amplifiers of returns. This is an integral part of any macro fund.
For many years, Aussie super funds ignored global stocks. That has passed in the last decade as Australia’s lost decade of growth and weak returns forced the emergence (and recent part destruction) of such global stock bellwethers as Magellan.
Now, Australia’s fattened super slugs have discovered a thing called the AUD!
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Australia’s pension funds are set to boost foreign currency holdings as an alternative to fixed-interest assets to shore up their portfolios against market shocks.
That’s the view of Mark Delaney, the Chief Investment Officer of AustralianSuper Pty, who sees this happening over the next five years amid persistently low yields on government bonds.
Given the Australian dollar’s link to demand for commodities and global growth, holding overseas currencies can be a good hedge against market volatility and downturns, he told the Bloomberg Invest Global summit. A Bloomberg gauge measuring strength in Australia’s dollar against its Group-of-10 peers tends to support this view.
Surely if those words were uttered in any other country there would be nothing but blushes of embarrassment. Currency hedges are an essential tool in any investor’s toolkit yet here we are with Australia’s largest super fund forced to contemplate their use. This is AUD bearish at the margin as outflows increase.
JPM has a snippet on the driver:
The renewed increase in bond-equity correlation in September likely pressured multi asset investors such as risk parity funds and balanced mutual funds to de-risk. Given a decent amount of de-risking has taken place already, these types of investors should pose less vulnerability for equity and bond markets in October.
In the near term, what perhaps presents greater vulnerability to both equity and bond markets is the risk from further downshifting by momentum traders such as CTAs which appear to have entered a phase of net long position reduction in equities and addition of net shorts in government bonds.
Longer term, persistent inflation could make this year’s shift in bond-equity correlation spill over into 2022. This would pose a bigger challenge for multi asset investors such a srisk parity funds and 60:40 funds.
I am not of the view that a great bond bear market is commencing. The base case remains that inflation is transitory based upon COVID distortions and stimulus. So I am actually waiting to buy bonds again as the various bubbles, the latest being energy, burst.
I am even more reassured that this will be a worthwhile trade by the exit of Australian super funds from it!