The weakening of the US dollar, driven by the rise in the popularity of US presidential candidate Donald Trump, is a real possibility and that will likely roil markets and impact investments, Liem said.
Japan’s negative interest rates and China’s slowdown are priced in, and the potential consequences of a Brexit are reflected in the pound, Liem told Fund Selector Asia. But a sharp decline in the US dollar is not.
“The biggest risk to our portfolio is if the US dollar weakens as the core case for our portfolio is that the dollar continues to be strong. That’s the reason we did well last year. For example, we hedged against a US dollar appreciation scenario when we invested in Japanese and in European equities.
“We’ve done that the past two years, but that could potentially change. It’s a good time to unwind the dollar hedge and change to share classes denominated in Japanese yen or euros. Especially for Japanese equities as the yen is known as a safe haven asset.”
In a balanced portfolio, most fixed income instruments TTG uses are also US dollar denominated. He said that the correlation between fixed income and equities has been converging to one over the past few years. If the dollar drops, the use of fixed income as a hedge for the portfolio will become less effective.
Moreover, US equity valuations are relatively rich due to a strong dollar, he said, and a depreciating dollar could drive US equity prices down.
“If we need to be more conservative, we would scale back on our holdings of US equities, which are now 30% of our typical balanced portfolio.”
Liem sees further downward pressure on the dollar as Trump gets more voter support and if he locks in the Republican candidacy for the US presidential election, which is in November.
“That could potentially change how the world looks at the US and internally how the US could change because he’s not being supported by core Republicans.
“The rise of Trump may lead investors to question the stability of the US and become less confident about the US dollar as markets are all about sentiment. For the first time, the inclusion of physical gold is becoming an interesting strategy. If people are concerned about the US dollar, gold is a good hedge.
“In the past, we didn’t like gold as it doesn’t generate income and has storage costs. But in a negative interest rate environment, holding a bit of gold starts to make sense.
“The problem for a wealth manger in using gold is that we can’t be too diversified and it is difficult to access physical gold,” Liem said. “It’s not like an institutional portfolio. It’s difficult for us to do a 2% allocation position, which is not efficient due to size and mandate.”
He added that alternatives such as hedge funds in the UCITS space that manage liquidity risk are also products his firm is looking at closely this year.