I don t have currency exposure or do I?

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1 Currency Moves There have been some big currency moves lately, particularly in the emerging world (Argentina I m looking at you!). In fact, not a single emerging market currency has appreciated versus the dollar over the past six months, with the average loss being -9.4%! Turkey and Latin America have been hurt particularly bad. Down -42%, -34%, -18% these moves are huge, particularly for currencies. The effect this type of currency depreciation has on a country (particularly an emerging one) can t be understated. Take Argentina for example their currency has depreciated by -42% in the span of the last 6 months relative to the US Dollar. That means that the cost to buy goods imported into Argentina from the US has basically gone up by +42%. Can you imagine increasing the cost of a shopping trip or a big ticket purchase by nearly 50%? Its crippling to the economy.

2 Another effect is debt related. Many emerging countries have dollar denominated debt (where the interest and principal payments are made in US dollars). Now imagine those payments going up by 40+%. Bloomberg summarized the effects of a plummeting local currency: True, cheaper currencies versus the greenback aid developing economies by making their exports cheaper for foreign buyers, but the negative financial effects swamp this positive, especially as hot money departs. Servicing dollar debts takes more local currency and makes imported oil and the many other commodities that are priced in greenbacks more expensive. When local currency holders realize the value of their money is drastically deteriorating, capital begins fleeing the country, putting further pressure on the currency. The central bank of the affected country often will step in to stem the tide by tightening monetary policy to prevent further currency weakness, which then puts pressure on the economy it s a vicious cycle. I don t have currency exposure or do I? Just because you live in a developed economy with a stable currency doesn t mean you re immune to the effects of volatility in other regions. If you invest in countries where currency volatility is on the rise, there can be negative (or positive) consequences. As an example, Brazil s stock market is up +19.1% over the past year in local currency terms. If you are a US investor and had an allocation to that market, you d have received the +19.1% return in Brazilian Reals but because that currency has been crushed (down roughly -20%), when you covert back into US dollars, you are down -1.1%!

3 Of course this dynamic can have a positive outcome, i.e. when you invest in a country who s currency has strengthened relative to your own home currency. Over a long time horizon however, these effects tend to even out. Here s a chart of the Trade Weighted US Dollar Index going back to the 70 s. There are ways to mitigate the effects of currency exposure in the short-to-

4 intermediate term (i.e. currency hedging), but we ll leave that conversation for another day. Bottom line, there are some big currency moves happening in the emerging world. They can have nasty consequences for both the affected economies and investors with a shorter time horizon. It s a situation worth keeping an eye on. Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange

5 rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or indexbased mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.