How to protect your investments in a currency war

Hiral Thanawala Moneycontrol News

Last week, Reserve Bank of India Governor Urjit Patel said, “A few months of turbulence are already behind us. It looks like this is going to continue, but for how long I do not know. Trade conflicts have evolved into tariff wars and now we are possibly at the beginning of a currency war.”

The central bank’s latest move of increasing interest rates validates the threat of currency war to our economy. Let’s understand what a currency war means, its impact on investors, where you should invest and ways to protect your investment portfolio in this situation.

What is a currency war? A currency war is when a nation deliberately devalues its currency and joins other countries to compete with them. Jimeet Modi, CEO and Founder at Samco Securities & StockNote, said, “When a series of countries one after the other deploy the same strategy of depreciating their domestic currency to boost their economy, currency wars occur. The deliberate depreciation in the domestic currency will stimulate the economy by making their exports more competitive in global markets.” Imports will in-turn become more expensive and these factors will spur growth as consumers will opt for local substitutes to imported products.

For instance, a person goes out to buy a particular grocery or item which is available at hundreds of shop but would prefer to buy it from a store that offers the same product at a lower rate. The devalued store (currency) will sell more of the same item as compared to other stores in the locality. That will, in turn, improve sales (exports) and decrease costs (imports).

Your portfolio could be deeply impacted in currency war Modi sees investor portfolios deeply impacted as the rupee’s devaluation to the dollar will erode profits as "most sectors in some way or other would have an exposure to the global markets. In the event of a trade war, the onset of a currency war would be inevitable.”

As seen from the Asian currency crises of 1997-98, global equity markets had undergone a massive fall due to panic selling and this translated to Indian markets as well. “Companies like Hindustan Unilever, Tata Steel, and Reliance Industries had all experienced a fall of 20 percent during the  July 1997 to March 1998 period. None of the sectors escaped the Asian currency crises and investors were crying under the burden of rising losses.” Financial analysts believe historical trends are more likely to repeat if such an event does occur in the future.

Where should one invest in this situation? In case of a looming currency war, Modi feels investors should have negligible exposure to equity as defensive sectors are already quite overvalued. "Putting fresh money at this point would not help in making exceptional returns.”