Sterling Will Rise in Value, But You Must Be Patient

A lot has been said about the volatility in currency markets through 2016, and making sense of it in a forward-looking context is dificult

Dan Kemp 29 November, 2016 | 8:00AM
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A lot has been said about the volatility in currency markets through 2016, and making sense of it in a forward-looking context is dificult. Morningstar remains an advocate for sensible, long-term currency exposures, and identifies the fair value of a currency by undertaking rigorous analysis of what we call ‘multiple deflators’. This means we seek to understand the impact of a currency shift on pricing power and inflation, which can indicate whether the currency could be expected to revert.

However, one of the biggest challenges when understanding currency is risk management. We know currencies are volatile and can shift in dramatic and unpredictable ways in the short-term. This necessitates a requirement for a wider margin of safety and greater scrutiny towards drawdown risk.

Drawdown Risk is a Major Issue for Currency Exposure

Drawdown risk is an essential element to our thinking, as it shapes the risk versus reward dynamic. Stated simply, we want to avoid assets that can fall significantly unless we can expect to be adequately paid for taking that risk.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Dan Kemp

Dan Kemp  is Chief Investment Officer, Morningstar Investment Management EMEA