on page 252 -the top paragraph, they mention that a country’s expanding share in the global portfolio decreases the value of the currency. I am not clear here- it should increase the currency value- it should appreciate right?
There was another thread on this, but I cannot find it easily.
You need to read the third sentence carefully: “Thus, investors will have to be induced to increase their strategic allocations to assets in that country/currency.” How do you induce investors to buy assets (or currencies)? By lowering the price.
If the allocation in the global portfolio increases of a particular currency, won’t its demand rise also? If demand increases of that currency, it will appreciate right?
Cart: meet horse.
disclaimer: i dont have the 2020 books and i am no expert on the topic but from my personal pov, id say that an economy’s strong streak should strengthen its currency and economy as a whole
expanding share in global economy should lead to a strengthening currency. Not sure though.
I agree with y’all.
The point in this section is that, to get the ball rolling, as it were, the currency will likely have to weaken initially.
does not make sense to me- why weaken?
If you want people to buy, say, left-handed teacups, lower the price on left-handed teacups.
If you want people to buy, say, see-through window shades, lower the price on see-through window shades.
If you want people to buy, say, Thai bhat, lower the price on Thai bhat.
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Looks like a bad written paragraphs. The book clearly guides us how good economies tend to get bigger share of the world portfolio because of better expected future performance, so global investors will tend to buy the currency associated to those assets and, therefore, see that currency strengthen in value. However, the book states otherwise.
As S2000 says, the book is telling (trying to) that a depreciated currency would make the assets denominated in that currency tend to be more attractive to investors.
Personally, I don’t like this part of the curriculum, a bad summarizing of another book…
I agree. The paragraph is terribly confusing. Here’s my take:
The purpose of section 6.2.3. - Portfolio Balance, Portfolio Composition and Sustainability Issues illustrates the different levers that investors can use to change the global market portfolio’s relative allocations and some of the sustainability issues. As stated in the first paragraph (page 251), currency values can be used to determine relative valuations of a country’s underlying assets without trading/valuing said assets. For example, a stock in Foreign Country X will become cheaper without the stock price moving if the currency depreciates 5%.
The way I read the paragraph in question is that while a country’s allocation to the global market portfolio will grow alongside rapid economic growth, in the long-term, those assets become more expensive. To be competitive within the global market portfolio, the foreign country’s currency will depreciatein order to offset the rich underlying asset valuations in order to attract capital from other countries. This is not the purpose of this section, but rather a fundamental principle for what comes next:
The depreciating currency effect will also be offset by the following: inflows of assets due to home currency bias; strong growth that domestic investors will fund and from foreign sources; and a small relative weight in the global portfolio; will eventually grow due to the changes noted above.
The reading then moves into another source of a long-term depreciation of the currency: a persistent current account (CA) deficit. However, not all CA deficits are created equal: If the deficit derives from strong investment spending, this is easy to finance. On the other hand, if the deficit arises from a low savings rate or weak fiscal discipline, there will be problems in the future. Countries with reserve currency status have more leeway to run a deficit due to any of the following reasons, the heightened demand for their currency - remember reserve status isn’t permanent (I’m looking at you, J Pow/J Yel)
There is a sort of ‘pecking order’ to the type of capital provided to a deficit country - we can organize it as how committed the investors are. Investment financed through less liquid asset classes (PE, Real Estate) and longer-term investment horizons (Public Equities) is viewed favorably relative to debt financing. (Think of a debt crisis)
In summary, several factors can affect currency values in the long term - we need to remember which direction each characteristic takes us.