THE FX FACTOR.
Brigitte Le Bris, Head of Currency and Global Fixed Income, Natixis Asset Management discusses the evolution of FX as an asset class.
What has been the development of FX as an asset class?
FX volume has dramatically increased in the last few years. According to the latest Bank for International Settlement tri-annual report, daily trading volumes were $5.3trn per day in April 2013 compared to $4trn in 2010 and $3.3trn in 2007. Institutional investors and hedge funds now account for 11% each while corporates are only 9%.
FX used to be traded by banks including central banks and corporates and unfortunately not many final investors were differentiating their domestic investment risk from the associated currency risk. Things are changing and more and more investors are now considering FX as a separate asset class.
What have been the drivers?
I think one of the most important things has been the growing trading volume of emerging currencies. In the past, there used to be a separation between G10 and emerging market currencies but that is no longer the case. The market is becoming more global. For example, the Mexican peso is very actively traded and the Chinese renminbi is now one of the top ten most active currencies. This is due to the globalisation of trade, the growth in emerging markets such as China and the move towards diversified portfolios.
Where does it fit into a multi asset portfolio?
The benefit of FX is that it is lowly correlated with other asset classes and it may help to provide diversification. Also, allocation to FX can be designed according to the level of risk that an institution can tolerate. FX fits perfectly with any multi asset allocation.
What have been the most critical market drivers macro and micro this year?
On the macro side, we are going through an economic decoupling between the US on one side and Europe and Japan on the other side, illustrated by diverging monetary policies followed by the respective central banks. At the same time, inflation remains very, very low. But my main concern is the recent and drastic fall of oil prices. It is becoming a real game changer, able to redesign totally the world financial landscape in the next months.
On the micro side, there has been the conflict between Russia and Ukraine which is still going on as well as the elections that have taken place this year in emerging markets such as Brazil, Turkey, South Africa and India.
How are these trends reshaping the currency marketplace and the way the buyside construct their portfolios?
I would say that investors are more and more aware of the importance of currency. Last year, the FX markets were very boring because there was not that much volatility. However, this has not been the case this year. The trend that we are seeing is that investing in FX is becoming more global but also much more sophisticated. As a result, an increasing number of institutions are delegating their FX investing to specialist fund managers who trade on a global basis. They are no longer just interested in the US dollar value versus majors but also the US dollar versus emerging currencies.
What impact has regulation has had on FX investing?
Regulation is positive in the long-term but may prove difficult in the short term. It can be frustrating but the good thing is that it provides greater transparency. However, the process is slowed down because you now have to sign International Swaps and Derivatives Association (ISDA) agreements with new and different counterparties. Even if the general content is standardised, the new rules means that there are more negotiations having to take place. I do think though that the process will become more efficient going forward.
How has technology changed the business?
An increasing amount of trading is now done through electronic platforms. They account for around 80% of volumes. In one way they are safer in that they speed up the trading and make the execution more efficient. In terms of best execution, it is easier to get the best price. Voice trading though will not disappear. This is particularly true with big orders and you still need the relationship with the counterparty.
We, as fund managers, use sales representatives as advisors but keep the execution separate. The brokers’ sales team will sort out the relevant information produced by their research department and inform us about flows that they are seeing while our trading desks will implement the orders as quickly as possible with the best prices. The platforms are very efficient in terms of helping us achieve best execution.
What opportunities and challenges do you see in 2015?
I believe that the strength of the US dollar will stay in place. The main risk is a lower (growth) economy than forecasted but at the moment I do not see anything that should derail the trend. And if oil prices remain low, it should increase the US consumers’ purchasing power and hence boost the economy.
The other trend that we are looking at is the weakness of the yen which could put other Asian currencies such as Korea and Singapore, as well as some emerging market currencies, at risk. However, there will be opportunities because volatility has come back into the market which is a very good thing. In these types of markets though investors will have to be selective.
Brigitte Le Bris joined Natixis Asset Management in September 2010 as head of currency and global fixed income. Prior to this she held the same position at Societe Generale Asset Management, now Amundi. Le Bris began her career in 1987 at Credit Lyonnais London before becoming a trader at the BBL in Paris in 1989. In 1993, she joined CDC Asset Management where she successively held money market and fixed income portfolio management positions. Brigitte Le Bris post graduated as a civil engineer from the ESTP School and has a Master’s degree in finance from the University of Paris Panthéon Sorbonne.
© BestExecution 2015