But it's no coincidence that the two major central banks that were quickest to adopt a zero interest rate policy at that time - the US and the UK - are now in the fortunate position of implementing monetary policy in a favourable economic environment. In fact, both countries are enjoying two of the strongest economic recoveries in the western world and, unlike the beleaguered eurozone, whose central bank failed to grasp the nettle and is still behind the curve, the monetary stimulus has not only helped to boost economic output, but importantly has also led to lower unemployment. As I noted in my currency feature a few weeks back ('Normalisation is coming so plan ahead', 17 Oct 2014), unemployment rates in the US (5.9 per cent) and UK (6 per cent) are little over half the 11.6 per cent figure for the eurozone. In fact, employment in excess of 30m in the UK is at a record level.
So, irrespective of the arguments for and against this monetary experiment, and the impact of the excess liquidity on emerging markets and a multitude of asset classes, the alternative - full-blown deflation and the collapse of the western banking system - would have been far worse if the UK and US monetary authorities had not implemented a series of measures to resuscitate the banking system and produce a wealth effect. Admittedly, their work is only half done and markets will be keeping a close eye to see how the central banks manage the precarious task of unwinding their massive bond buying programmes.
Markets are eagle-eyed, and so am I, which is why I pay close attention to the language, and minor changes thereof, in the policy statements from both the Bank of England's Monetary Policy Committee and the US Federal Reserve's Open Market Committee (FOMC). It was therefore informative to note the change in language in last week's policy statement from the FOMC and one paragraph in particular. Namely:
"If incoming information indicates faster progress toward the Committee's employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated." Taken together with the statement that "underutilization of labour resources is gradually diminishing", I interpret this as a signal that the Federal Reserve is preparing the ground for a rate rise, the usual caveats aside. This is given further weight as the FOMC adds that it believes the fall in energy prices which has been dampening inflation is unlikely to be sustained, meaning that "the likelihood of inflation running persistently below 2 per cent (target rate) has diminished somewhat since early this year".
Bond market signals
The move in two-year US Treasury bond yield tells a story, too. Having started October at 0.57 per cent, the yield collapsed to 0.24 per cent midway through the month, reflecting the spike in risk aversion and flight to safety during the growth scare. However, since the FOMC meeting the yield has recovered to 0.49 per cent and is now only seven basis points from where it started last month. In other words, investors have brought forward their expectations of a rate rise. The futures market indicates the first interest rate hike could still come as soon as June.
In the circumstances, it's completely rational for investors to position their asset allocation with a dollar-weighting bias. Why wouldn't they when it still looks a sound bet that the world's most influential central bank will be the first to raise interest rates after the global financial crisis. The move in the five-year US Treasury yield is telling: up 48 basis points to 1.59 per cent from those October lows. So, with the US economy growing strongly, and its central banks preparing for monetary tightening, I would anticipate the greenback to continue to appreciate, and in particular against the battered euro. That's important to me as I have a particular interest in these economic developments.
Setting the record straight
That's because I included currency manager Record (REC: 33p) in my 2014 Bargain Shares Portfolio. The main reason for my interest in the company was that I anticipated a strengthening of the US dollar this year as the US Federal Reserve tapered its quantitative easing programmes and for this to boost demand from US investors looking to hedge currency risk.
However, although the greenback has strengthened significantly since the start of July, in the first half it was actually weak contrary to what many currency strategists had predicted. In hindsight, we underestimated the effect on foreign-exchange markets of the huge currency flows back into the eurozone as European banks repatriated funds and shrunk their balance sheets ahead of the eurozone banking stress tests announced last week.
However, with those technical flows now in the past, and the odds favouring the US central bank embarking on a tightening cycle, then I would expect interest among US investors in currency hedging strategies to pick up. And so does Record's chief executive James Wood-Collins, who noted in the company's quarterly trading update last month: "Increasing divergence in central bank policy, and the related rise in volatility in currency markets, continue to generate interest in our currency for return strategies, after a prolonged period of little or no new demand. This has been accompanied by more recent US dollar appreciation which, if sustained, we would expect to foster further interest in currency management among US investors, as well as by renewed interest in hedging from UK investors."
Mr Wood-Collins adds that the business "continues to see broad interest across our diversified product range from potential clients and consultants in North America, Switzerland and the UK. While procurement processes are typically competitive, and their timing uncertain, we are hopeful that further progress will be made in the current financial year."
It's a theme I expect the company to highlight in its forthcoming half-year results to the end of September 2014, which are scheduled for release on Friday 14 November. True, guidance from analysts at Edison Investment Research is that full-year profit for the 12 months to the end of March 2015 will be down on the previous financial year, when Record reported pre-tax profit of £6.5m on revenue of £19.9m. Edison predict profit of £5.4m on revenue of £18.3m in the 12-month period, so it's only fair to flag up that half-year profits next week are likely to be down on the £3.1m figure reported at this stage last year.
Brightening prospects
However, it's what lies ahead that counts most, and it will not take too many new mandate wins to lead to upgrades on this year's depressed earnings estimates. The company currently has 49 clients and $52.6bn of assets under management, so it's worth noting that all three of its currency strategies produced positive returns in the three months to the end of September 2014. For example, Record's Active Forward Rate Bias (FRB) product produced a return of 1.36 per cent over the quarter on an ungeared basis. This compares rather favourably with a negative return of 0.38 per cent for the FTSE Currency FRB10 index.
It's also worth pointing out that EPS estimates of 1.9p for the 12 months to the end of March 2015 easily cover the 1.5p share dividend the company declared last financial year, so the payout is secure. Indeed, the board has gone on record as stating its intention to retain the overall dividend payable at 1.5p. On that basis, the historic yield is 4.5 per cent. Moreover, Record had net funds of £27m on its balance sheet at the end of March, or the equivalent of 12.3p a share. That cash pile accounts for 37 per cent of the company's market capitalisation of £73m.
The shares are hardly highly rated, either: on a cash-adjusted basis the forward PE ratio is only 11. And with a clear divergence of monetary policy from the world's central banks likely to spark renewed interest in Record's currency hedging strategists, the 'E' in that 'PE' has significant scope to recover.
Admittedly, investors with higher levels of risk aversion may wish to await for the trading update from the company next week, but at this stage I have no reason to change my positive stance, albeit Record's share price is down 10 per cent on my recommended buy in price of 37p. Buy.
Please note that I published 34 investment columns last month, all of which are available on my IC homepage...
■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.75 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
