With the prospect of many nations mobilising for a currency war, James Lawson, director at Ledbury Research, considers the impact on the wealthy
The jury is out regarding the extent of currency wars. On the one hand, many experts believe exchange rates are being deliberately manipulated by governments in an attempt to improve international competitiveness.
Others contend that the exchange rate movements we are seeing weren’t explicitly targeted, but simply the result of central banks rightfully pursuing their mandates to boost domestic demand.
Whatever their motivation, the monetary and fiscal policies being followed in the US, Europe and Japan are likely to lead to big changes in exchange rates over the coming years. The most extreme recent example is the Yen – down almost 20% against the dollar in the last three months alone. Big changes in currencies will have a big change in wealth.
“ The fiscal policies being followed in the US, Europe & Japan are likely to lead to big changes in exchange rates ”
One potential outcome of this shifting landscape is rising stock markets and more general asset price appreciation. The Nikkei index, for example, is up 30% in the last three months. However, left unchecked, these policies have the potential to trigger market instability, capital flight and inflationary bubbles. These will threaten wealth accumulation prospects.
This delicate trade-off will bring the issue of how and where wealth is held sharply into focus, provoking a reassessment of asset allocation and product preferences.
At a basic level, offerings that insulate or hedge currency changes, such as hedged share classes and ETFs, will prove popular. A more sophisticated approach may involve recommending foreign currency financing options, such as Yen denominated business loans.
“ Tangible assets may also be favoured as they can easily be sold in a number of currencies ”
Tangible assets may also be favoured as they can easily be sold in a number of currencies. The fact that classic cars (395%), rare coins (248%), stamps (216%) and fine art (199%) have all returned significant amounts over the past 10 years will not have gone unnoticed by wealthy investors. Indeed, 64% of China’s millionaires are already amassing high-end collectables (Hurun).
Typically, UHNW investors have complex webs of wealth spread around the world and across asset classes. For these most sophisticated clients, they may start to look at the world with a bespoke, single currency.
Value changes across their portfolio would be converted by the wealth manager or family office and conveyed to the client as simple changes in their single currency. This would enable these notoriously time poor individuals to track their finances across the world at a glance, without having to worry about numerous currency fluctuations.
Service providers, both inside and outside of finance, who get on the front foot with regard to the changing macro picture and display innovative, thoughtful and personalised solutions will steal a march on the competition.
To further investigate wealth & affluence on Luxury Society, we invite your to explore the related materials as follows:
- Key Insights from The 2013 Wealth Report by Knight Frank
- The Rich Just Keep Getting Richer
- Why Luxury Brands Should Target the Top 1%
