PIMCO's Sundstrom: It Is The First Time In My Career Where FX Has Had Such A Deep Impact On Asset Selection
Geraldine Sundstrom of PIMCO
Geraldine Sundstrom, managing director and manager of the €1.1bn GIS Dynamic Multi Asset fund at PIMCO, has said responding to the "cold currency war" is increasingly becoming a crucial part of her investment process, due to its impact on market performance.
The manager said the effect of globalisation and the low interest rate environment had increased currency volatility, meaning the wrong hedging decision could wipe out returns.
She gave the example of the rally in the euro last year, which climbed from $1.05 to $1.20. This impacted exporters' profits and meant the Euro Stoxx 50 rose just 6.5% as a result, versus 19.4% for the S&P 500.
"It is the first time in my career where FX has such a deep impact on asset selection," Sundstrom said. "It is impressive that Europe has had the best growth in two decades and the stockmarket has gone almost nowhere."
To hedge or not to hedge? How to think about your currency exposure
The manager said FX trading over the past two years had been the most important factor in portfolio returns, as she had hedged almost 100% of assets in euro and sterling.
"The world is very global, companies are more integrated than before and FX will have an immense impact on the profitability of companies but also the response function of central banks. We call it the cold currency war."
Currency was a key factor behind Sundstrom's underweight position in European equities, as she said the strong euro would force the European Central Bank (ECB) to delay hiking rates, which would impact the performance of sectors such as financials.
The ECB halved its bond-buying programme from €60bn to €30bn a month at the start of the year but it is yet to raise interest rates, while it is expected the Federal Reserve will hike three times this year.
"We have a forecast that is much later than market consensus and it will be a drag on the financial sector, " Sundstrom said.
"If you look at monetary policy, US banks will benefit from rising interest rates while European banks are burdened with negative rates, which is a big drag on earnings."
She also noted the impact of deregulation in the US versus a solid regulatory framework in Europe, while President Donald Trump's tax reforms will act as further tailwinds for US equities.
"Trump has delivered a weak dollar for the US economy, which is relatively crucial along with the tax reform," she continued. "When you put these things in the balance, the needle tips towards the US."
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