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Why should we insist on two hands in asset allocation, with both RMB and US dollar?

Click: Time:2021-08-06 11:36:31

So far this year, contrary to industry expectations, the RMB has not been caught in a depreciation vortex, but has continued to strengthen. After depreciating by 6.5% throughout 2016, the yuan has appreciated by nearly 7% cumulatively so far this year, accelerating after entering mid-August under the influence of a weaker dollar. Then the previous rise was also hurried, and the recent fall was also hurried. since mid-September, the RMB has retraced more than 1,700 points, nearly 3%, against the USD. The exchange rate is unpredictable, so is this a reversal of the pattern of the RMB and the USD? Is the general direction for investors to increase their dollar allocation going to change?

 

The logic of increasing the USD and balancing the cross-currency allocation of RMB and USD has not changed.

 

The logic of USD allocation

 

The short-term rise of the RMB does not hinder the general direction of a stronger USD in the long term.

 

1

 

The U.S. economy has taken the lead in the recovery of other countries in the global economic downturn, and the continued demand for the U.S. dollar has supported the value of the U.S. currency. Foreign dollars flow back to the U.S. through the capital market, pushing up U.S. asset prices to bring wealth effect on the one hand, and depressing U.S. domestic interest rate levels on the other, facilitating leveraging for the U.S. residential sector through structured financial products.

 

2

 

From a demographic perspective, U.S. consumption power continues to be strong. The U.S. population has been growing positively and has not experienced the negative population growth that Japan has experienced since 2004, and is even more resilient than China, which is in the midst of an aging society trend.

 

3

 

The interest rate hikes and tapering that are still on the way are also controlling the supply side of the dollar, and rising demand while supply is expected to fall will remain an immediate factor driving the dollar higher.

 

Second, Chinese investors' dollar allocation is just beginning.

 

Looking at mature markets around the world, more than a third of the financial assets owned by individuals in countries like Switzerland, the UK and Australia (excluding non-financial assets such as real estate and art) are allocated outside their home countries. South Korea, India, France and Japan also have more than 18% of their allocations abroad. In contrast, by the end of 2015, the proportion of Chinese residents' investable financial assets that were invested abroad accounted for only 4.8%. Such a low proportion of offshore investments suggests that the process of increasing dollar assets by domestic investors is far from the time when they need to consider retreating.

 

In addition, the U.S. dollar, as a reserve currency with international payment functions, is not only more stable in value compared to other currencies, but also assumes the role of "anticoagulant" in asset allocation: at present, RMB assets still do not have strong global liquidity. The US dollar has the strongest liquidity in the world, even with gold. If you replace some of your RMB assets with USD, the global liquidity of your entire assets will increase dramatically. The greater the share of USD assets, the higher the overall global liquidity. A highly liquid blood is what brings healthy muscle and wealth vitality.

 

It is too early to say that the RMB is back on an uptrend

The yuan's mid-price against the dollar rose for the fourth consecutive day, hitting an 11-month high, according to data from the China Foreign Exchange Trade Center. Since the end of last year, the yuan has shown a shocking upward trend against the dollar, and recently it has accelerated its appreciation. Since the end of last year, the RMB has appreciated by about 4% against the USD, a change from the previous trend.

This wave of rapid appreciation has left many investors stunned as to where the sudden change in the trend of the RMB has come from.

 

1. Short-term factors

 

Some dollar position holders left the market with the help of the dollar index rebound, triggering market panic settlement. This signifies that after the second anniversary of the 811 exchange rate reform, the devaluation expectation that has been shrouded in the market for a long time has loosened.

 

2. Fundamental impact

 

China's economic growth in the first half of the year was better than expected. Data show that China achieved an economic growth rate of 6.9% in both the first and second quarters. It is significantly higher than the global average. The manufacturing industry's leading index, PMI, has been above the Ronggu line for 12 consecutive months. The International Monetary Fund raised China's economic growth forecast for the third time this year in 2017. In the first seven months of this year, China's goods trade imports and exports grew by 18.5% compared to the same period last year. The stabilization and rebound of China's economy has played an effective role in supporting the RMB exchange rate.

 

The rapid appreciation of the RMB against the US dollar this time is distinctly different from the previous three rounds - the appreciation of the RMB exchange rate occurred against the backdrop of the rebound of the US dollar index. It not only shows the loosening of RMB depreciation expectations, but also breaks the consistent one-sided appreciation or one-sided depreciation of the RMB against the USD. It foreshadows that the RMB will hopefully truly achieve two-way fluctuations against the USD during the year. However, it is still too early to say that the RMB will go into an appreciation channel in the future. 

 

Many investors always like to stare at the curve to do investment, just like doing stocks every day looking at the K-line, when the configuration also daily stare at the trend chart of the currency market, either only look at a currency all bets, systemic risk is great; or like to make quick money, using the exchange rate speculation arbitrage, chase up and down, resulting in the more you do the more wrong.

 

Concerned about the currency market itself is right, but concern does not mean frequent operations, we have to adhere to the logic of configuration: the core meaning of cross-currency allocation is not foreign exchange speculation, is the asset allocation itself.

 

What assets should be matched, partially offsetting exchange rate fluctuations

 

To achieve a scientific asset allocation, the first thing to ensure the diversification and low correlation of the asset package, reference to the three golden principles of the establishment of the asset allocation ratio chart, is a very practical investment reference tool:.

 

Data shows that "cross-asset class allocation" across international borders can reduce risk by 46%. Private equity, capital markets, real estate finance, overseas private credit, domestic fixed income and cash, insurance protection, of these six asset classes, excluding the impact of the type of investment currency, only capital markets and currency markets have a strong correlation, the rest of the assets can not only withstand the risk of exchange rate fluctuations, but also can bring a variety of investment dividends.

 

 Match both currencies to diversify the systemic risk of a single currency

 

Assets in a single country are not only limited by its economy, but also by investment opportunities, so investing across geographic countries gives your asset package the ability to withstand systemic risk.

The RMB and USD investment markets each have their own characteristics and advantages. The U.S. dollar is behind a relatively mature financial investment market with many good assets and excellent institutions that can help investors achieve long-term solid investment returns. The RMB allocation can more easily grasp the opportunities of domestic industry development. The two can complement each other's strengths and weaknesses to maximize the "ceiling" of returns. In concrete terms, you need to have a "RMB+USD" allocation in each asset class.


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DC.WEALTH.(Hong Kong)

(852) 2115 9097

(852) 2117 1522

info@dcwealth.com

Room 603, Low Block, New Era Plaza, 181 Queen's Road Central, Hong Kong

DC.WEALTH.(HangZhou)

(86) 571 8970 5282

(86) 571 8970 5280

Room D, 11F, Dikai International Center, No.19 Dangui Street, Qianjiang New Town, Hangzhou, China

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(86) 18805749323

Room 404, 1872 Office Building, No.518 Wan Tou Road, Jiang Bei District, Ningbo

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