New research from Deutsche Bank shows that returns from FX macro managers have dropped to their lowest levels since the 1980s, despite the fact that “there does not appear to be a structural decline in the excess returns available to FX investors”.
The Deutsche Bank Currency Index (dbCR), which captures the beta available in the FX market by following a simple carry, valuation and momentum strategy, is at -2% for the year, but is well within historical ranges.
Hence the assessment from George Saravelos, an FX strategist at Deutsche and author of the research note, that despite low volatility and uncertainty around key macro issues there doesn’t appear to be a structural decrease in potential FX returns.
Yet, according to the report, FX macro managers have not been performing well this year.
“FX macro manager returns have typically tracked market ‘beta’ well with modestly higher returns reflecting the presence of market ‘alpha’. Something highly unusual has happened this year, however: returns have collapsed to the lowest levels since the 1980s with the divergence between macro manager and beta returns at a record high,” says Saravelos in the research note.
He concedes that it’s hard to precisely pinpoint what has caused this sharp deterioration in performance, but suggests that one reason for it may be “a breakdown in the traditional macro relationships that would be expected to prevail at this stage of the global cycle”.
Here’s Saravelos’ assessment in full: “The single biggest surprise this year has been a slowdown in US inflation despite a continued closing of the output gap, for instance. The upside of discretionary investing is that it is more forward-looking than cycle-agnostic ‘beta’. The downside is that when the forward looking view is wrong, the cost can be greater. The most important takeaway for optimists like us is that excess returns have not disappeared from the market. There appear to be fundamental shifts in global macro drivers and it is taking time until investors fully understand them.”