Asset Allocation: Global Asset Management : Exceptional Returns

Opportunities for exceptional investment returns from global investment come from two possible sources:

1. Buying assets at a low price because the local market is ‘undervalued’ - good value in absolute terms.

2. Buying assets at a low price because the local currency is ‘undervalued’- good value in relative terms.

Either approach will require a lot of detailed analysis: country/currency risk profiling, business risk analysis, an understanding of local accounting practices and knowledge of local investors' attitudes.

The local market is undervalued - foreign assets are 'good value' in absolute terms.

In a global marketplace it makes sense for investors looking for future star performers to look around the world. And the increasing development of private sector industries in countries which used to have a large amount of state-ownership has further increased the range of potentially profitable investments. Looking for value and growth potential means spotting either a world-beating company in the making or a new national industry sector growing in order to meet rising local demand.

Smaller currencies and emerging markets can offer significant growth and value potential - but at high risk - and that is not only investment risk, but also risks arising from the absence of many of the desirable features covered in the previous topic - namely market maturity and depth.

The local currency is undervalued - foreign assets are 'good value' in relative terms.

Here the opportunity for exceptional returns derives from the fact that the investor's reference currency is unusually strong against the currency in which the assets are denominated. This means that a well timed purchase can acquire a stock which may be fairly priced in the local market but at a low price for the foreign investor, thanks to the strength of the exchange rate.

For this sort of strategy to work the reference currency will need to depreciate against the asset's currency in the future. This is a tactical allocation approach whose success relies upon accurate analysis of exchange rates as well as clear fundamental analysis of the foreign asset in question.

For example, a USD-based investor may decide that the USD is unrealistically strong against the euro. Combine this view with a belief in the fundamental long-term viability of a particular euro-denominated asset, and the result is a clear buy signal because:

1. you expect the value of the asset you have bought to increase in value in absolute terms and ...
2. you expect the value of the asset you have bought to increase in value in relative terms; you expect the euro denominated asset you have bought to be worth more in dollar terms because you expect the euro to appreciate against the dollar.