One of the most obvious outcomes of diverging monetary policy has been the depreciation of currencies in an effort to make markets more attractive. The euro vs. dollar was at 1.23 on Dec. 18, compared with 1.37 for the same date in 2013.
The yen slid almost 2% against the dollar, to a six-year low of ¥111.5 to $1, after the Bank of Japan’s announcement on Oct. 31 to increase its QQE.
That, coupled with a move by Japan’s ¥130.9 trillion ($1.1 trillion) Government Pension Investment Fund, Tokyo, the largest pension fund in the world, to increase its allocation to international assets at the expense of domestic bonds, has buoyed the market’s attractiveness.
“An interesting part of Japanese policy is that it is willing to target riskier assets as well,” said Eric Lascelles, chief economist at RBC Global Asset Management Inc. in Toronto. “The goal is not just to pull bond yields down, but also to increase risk appetite and generate a positive wealth effect through higher stocks … you have a big pension fund that has seen its mandate shift in a significant way and is much more willing to purchase foreign securities.” The weaker yen, he said — created through monetary policy loosening — has been “a big success.”
Currency divergence is set to continue, managers say.
“Our medium-term currency outlook indicates the U.S. dollar will appreciate against the euro, yen and most of the European-bloc currencies as the Fed normalizes policy, while the ECB continues to ease liquidity conditions,” said Adrian Lee, president and chief investment officer at Adrian Lee & Partners in London.
A weakening euro is a “strong tailwind” for Europe going into 2015, said Jamie Carter, London-based portfolio manager at European equity specialist S. W. Mitchell Capital.
Policy is also potentially a problem for the U.K. in 2015, in terms of uncertainty. In May 2015, a general election will take place to decide which political party will take precedence in the House of Commons.
There is significant uncertainty around the outcome of that election.
“The problem that we always have with politics is it is very difficult to make decisions based on things where we don’t know what the outcome will be,” said Colin Morton, a portfolio manager within Franklin Templeton Investments’ U.K. equity team, in London. “The way the election is currently lining up looks maybe quite worrying from an international perspective.”
He said the concern is how the balance of power will fall. The current concern is that the Scottish National Party will take the majority of seats in Scotland, leading to an informal agreement with one of the key U.K. parties, the Labour Party. The SNP, said Mr. Morton, would become the third-largest party in the House of Commons.
“This has the potential to be quite worrying. Our feeling is, if it becomes more of an issue, sterling will struggle as people will worry globally about the outcome — (potentially) having a monitory government with a loose agreement (with the SNP.)”
In general, investors will have to be wary of policy divergence and uncertainty, and the effects on currency. “Managing global currency risk will be a key theme for investors next year,” said Bill Street, head of investments for Europe, the Middle East and Africa at State Street Global Advisors in London.
