Currencies are a wise investment "because you can design a portfolio with a low correlation"- Axel Merk



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Axel Merk

Related:
Axel's bio
Merk Insights Report
"Sustainable Wealth" - Axel's book

Axel Merk, president of Merk Investments and a leading currency expert, breaks with two widely-held beliefs about Forex trading – one, that it is speculation; and two, that leverage is necessary. “We think of [currency trading] as investing. You can design a portfolio with low correlation without engaging in leverage,” he says.
In this first installment of a two-part interview on currency trading, Merk also explains how the global recession has shifted his investment paradigm from looking “at the world in terms of opportunities” to considering it “in terms of risks that investors are able to take.”
Merk also provides specific advice for trading the currency market, which he sees as one of the best opportunities for investing given its unique characteristic for portfolio diversification.
In the second part of this interview to be published in the coming days, Merk will put forward his long-term outlook for the major currency pairs.
Besides being the President and Chief Investment Officer of Merk Mutual Funds, Merk is also the author of the book Sustainable Wealth, makes regular appearances as an investment expert on various media outlets throughout the world, and has been a contributor to FXstreet.com for the past five years.

Let's begin with how the recent global downturn has changed the way you think about trading and the markets.

I would not say I have experienced any major changes, but it did prompt me to write a book on the subject called Sustainable Wealth. What I wrote in my book was that one thing that had changed on how investors may want to look at the world is that they should look less at the world in terms of opportunities and more so in terms of risks that investors are able to take.

Due to the recession?

Yes. Because we are in an world where more and more decisions are not made based on the fundamentals but rather on the potential interference by governments. If a government does not like something, it just throws a million dollars at the problem.

Why is that a problem for investors?

Because one of the side effects of that is that more and more asset classes are moving in tandem. When you throw a lot of money at a problem, either through fiscal or monetary measures, you are moving entire blocks of asset classes. The problem is that traditionally as an investor you want to have diversification, and that is very difficult to achieve in this context of government intervention. That is one of the reasons I like currencies so much because you can design a currency portfolio with low correlations to other assets. And so the trend we lean towards is to guide investors to the currency market in order to find solutions to this problem.
 

So you consider the currency market as a wise place to invest in these turbulent times?

That's right, for a couple of reasons. One, due to the liquidity in the currency markets. Even in the crisis, while people did not always make money, at least they could execute on what they were doing. And second, you can design a portfolio with a low correlation. For example, if you take a very simple strategy of going long on the Australian and short on the New Zealand, the returns you are generating are going to have a very low correlation to whatever else you are holding. That sort of thing is what you can do with a currency strategy that you can not achieve with strategies based on equities or bonds, for instance.

"One thing that has changed on how investors may want to look at the world is that they should look less at the world in terms of opportunities and more so in terms of risks that investors are able to take"

Do you have other general comments to add on your views of currency trading?

Yes, one more thing. We do not use leverage in our strategy, and I do not think that investors need to use leverage. People always think of the currency market as speculation, we think of it as investing. You can design a portfolio with low correlation without engaging in leverage.

Any tips to currency traders with small or medium-sized accounts?

A couple of things. One is just to look at what the big guys are doing. The central banks are investing in baskets of currencies; they do not think that any one currency is going to be a safe asset anymore. So investors may want to consider doing the same thing. Developing a more sophisticated strategy of a basket of currencies with different long and short currency pairs may be difficult if one does not have the experience necessary to do so on their own. If that is the case, then one may want to look at mutual funds or to another investor who could manage the portfolio on a professional basis.

What about advice then for those traders without a lot of experience but who want to manage their own investments?

Depending on the individual's risk profile, investors can follow a strategy based on a specific outlook for a given region. We have talked about how the euro may be stronger even with low economic growth [in the second part of this interview]. Well, at the other extreme of the spectrum is something like the Australian dollar. I say this as an example and not as investment tip, but people who believe in the reflation story, that governments will print money and do anything they can to get the economy going, then they should look at a country like Australia as a prime beneficiary. If you believe in the Chinese recovery, then the Chinese will have a lot more purchasing power and the Australian dollar will benefit from that.

The second part of this interview will be published in the coming days.

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