Content provided by Paula Wieck, CLS Manager of Investment Research/Portfolio Manager
So far this quarter, we’ve observed reversals in the strength of the U.S. dollar and prices of commodities such as gold and oil.
As U.S. economic data has weakened, expectations have risen that the Federal Reserve will raise interest rates later than anticipated. This has caused heightened exchange rate volatility, and the dollar has declined over 5 percent relative to the euro. Amid this weakness, oil prices have surged over 10 percent higher, and gold has shown strength. (If a currency weakens, one unit cannot buy as many goods, which drives prices up.)
The impact of currency moves doesn’t stop there. Specifically, companies that generate most of their revenue in the U.S., such as smaller-cap companies, are highly exposed to dollar volatility, and the weakening dollar has hurt profits. Consequently, we’ve seen small-cap U.S. companies underperform larger, global companies this quarter (larger, global companies generate part of their revenues overseas and therefore are more immune to dollar weakness).
Short- to intermediate-term exchange rates can be quite volatile, and thus we believe it is important to maintain a well-balanced, diversified portfolio with multiple asset classes and currency exposures to weather the storm.
So in light of the weakening dollar, where could investors look to add value in their portfolios?
We believe the best way to add value is by finding asset classes that have low valuations (buying at a discount, so to speak). CLS has a proprietary relative valuation composite that tracks discounts and premiums on major asset classes. Here is what we’re seeing:
While the broad U.S. equity market looks expensive, investors can add value through the energy and technology sectors. According to the current composite, energy is trading at a 14 percent discount relative to the broad U.S. market historically, and technology is trading at a 24 percent discount. In addition, growth equities are currently trading at a 12 percent discount, whereas value is fairly valued. Finally, large-caps appear more attractively valued than small-caps: Large-cap equities are currently trading at a 3 percent discount, while small-cap equities are trading at a 6 percent premium.
The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change. Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such. This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss. This information is prepared for general information only. It does not have regard to the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Individual client accounts may vary. Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies.