Meanwhile, as the impact of the Brexit vote has been acute, our focus is on identifying good, long-term stores of purchasing power. With the UK’s reliance on capital inflows, the pound had clear risk for several years, but it now appears undervalued on PPP measures versus the dollar and moderately so versus the euro – although the risks remain. Hence, while the pound appears cheap, which is a positive sign for the long term, it is important to consider if it has the margin of safety that we would prefer to see as active currency investors.
The real risk that matters in investing is of permanent loss of capital. Currency volatility itself isn’t necessarily bad – in fact, it can create buying opportunities. The real danger is when a currency collapses, which can permanently impair the investor’s purchasing power.
In the absence of extreme views, we believe the prudent course of action is to avoid making large currency bets and resisting the temptation to make short-term predictions. As Pascal noted: “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” That’s not the worst advice for currency traders either.
Nick Purser is a currency analyst at Orbis Investments
KEY FIGURES
$4.22
UK price for McDonald’s Big Mac, as per the Economist’s PPP-measuring Big Mac Index
$4
Price for a Big Mac in the eurozone
$5
Price in the US
8.7%
MSCI World’s current exposure to the Japanese yen
