Listen up. I have something very important to tell you.
There’s a dangerous investment principle masquerading as sound investment advice. It could be seriously damaging your investment returns.
It’s this: “UK investors should hold predominantly sterling denominated investments.”
It seems to be received wisdom. But I want to show you why this ‘wisdom’ has run its course.
The times, they are a-changing
The idea behind the principle is quite simple really. If a UK investor is saving for their dotage, they should save in sterling as that’s what they’re going to be spending.
Holding other currencies exposes you to currency risk. Samsung may look like a great stock. But if the Korean currency (the won) falls out of bed, the income from your stock may not cover your shopping at Sainsbury’s.
And so most UK financial advisers suggest up to 80% of your portfolio should be sterling denominated.
From where I’m sitting, that’s ridiculously sterling biased. I don’t like the feel of it. And I’ll show you what to do about it in a moment.
For starters, if you follow that ‘wisdom’, you’re missing out on a massive diversification benefit. And it kind of ignores the fact that people are more mobile these days. Many retirees don’t want to spend all their savings in sterling. Whether it’s cruising the world, a holiday home, or even a permanent move abroad – then sterling might not be the best bet.
But let’s leave that to one side. It’s not the thing that’s bugging me.
It’s all about the money
Here’s the way I see it – and you probably don’t need much arm-twisting to see my point. We’re living in an increasingly globalised world. And this isn’t the Victorian sort of globalisation. Today’s globalisation offers billions of people in the emerging markets the opportunity to come along for the ride.
We’ve all heard about the great wealth shift from West to East. I’m sure you understand the concept. But the way this is playing out isn’t quite how it was envisaged.
During by-gone globalisations, the West controlled currencies and trade by force. Very few of the locals were given the chance of participating in the spoils of industrialisation.
But today, the spoils are building up on the side of the emerging markets. The West has ended up in hock to the emerging markets. And the effect on the currency markets is starting to become clear.
You may have noticed that Western currencies have been weakening. That’s particularly the case with the dollar. But it’s also been true for the euro and sterling, too. But in my opinion, we are only at the start of a long journey towards a new equilibrium.
In Wednesday’s Right Side, I talked about how the UK economy is starting to rebalance as our weakened pound works its magic. That redress has been brought about by sterling’s weakness against the euro and the dollar – the currencies of our major trading blocs.
But when you look at how those major currencies compare to the emerging world’s currencies, then you’ll see that there could be serious trouble ahead.
A serious game-changer
Up until now, most of the emerging market currencies have been linked to the dollar and the euro. The technical term is ‘pegged’
Emerging market currencies – and that includes the great Chinese yuan – are mostly pegged to the dollar. And for the emerging European countries, it’s the euro that provides an anchor. Central banks ensure that their currency trades within a tight band of its anchor.
Back in the early nineties, the pound was pegged to the ecu (European currency unit) during our brief flirtation with the ERM. But the pound was too weak and it got kicked out.
This time around it’s the anchor currencies that are too weak for the pegees. Our weakened currencies and loose monetary policies are causing tremendous inflation for emerging economies. And the exchange pegs are starting to work themselves loose.
The emerging world is hiking interest rates and allowing their currencies to float to the top. And us Westerners are on the wrong side of the deal. I’ll show you what I mean.
How this affects you and your money
For the last few decades, our hard money allowed us to import goods from the emerging markets on the cheap… in fact, we even imported labour too. And we still do! But now things aren’t quite as cheap as they used to be.
Instead of importing goods at ever decreasing prices (deflation), commodities inflation and a weakened currency means we’re now importing inflation. I just can’t see any reason why this adjustment won’t continue for decades to come.
Twenty, or thirty years from now, I see a world that values Chinese and UK labour equally. Though you could probably argue the Chinese should be rated higher.
And it’s the exchange rate that will level the playing field. Your shopping at Sainsbury’s will be a lot dearer in the future. And if you keep most of your assets in sterling, then instead of reducing currency risk, you’ll find yourself right in the thick of it.
Right now the real conundrum of globalisation is starting to dawn on shrewd investors. And they’re taking action. It’s why I’m forever banging the drum for a geographically diversified portfolio and one that includes a good slug of commodities.
One colleague of mine who takes this very seriously is Mike Tubbs. When you look at the portfolio he’s been building for readers of his superb Research Investments, you can see that he’s careful to give a broad geographical diversification. He doesn’t want to be too heavily exposed to the UK economy or sterling – and that’s good sense.
And he’s got a very interesting, focused approach to picking stocks, too – unlike any I’ve seen. You should take a look at how he does it.
Keep reading The Right Side. Short of a global trade war, I expect to be continuing this theme for decades to come. I’ll be looking at other ways that you can diversify away from sterling in order to protect and grow your wealth.
But don’t expect the wider investment industry to keep up. They’re all looking in the rear view mirror – and past globalisations tell them that Western hard currencies reduce risk. Expect sterling bias to remain the order of the day right up until it’s too late.
• I mentioned Mike Tubbs. You should really take a look at this report about his technique. He’s got some cracking stocks in his portfolio (check out the table in the report). And using the special link I give you below, there’s a way you can get a substantial discount for taking Mike’s no obligation trial.
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•Dr Mike Tubss’ Research Investments is a regulated product issued by MoneyWeek Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Customer Services: 0207 633 3780.