The Dollar Dilemma and US Stocks

Despite the strong performance of the US economy, we question the sustainability of US stock outperformance

• The US dollar is currently overvalued against major currencies, and tightening rate differentials could lead to a weaker dollar

• Emerging markets could benefit as capital works its way back to Japan and China

Making a case against the US equity market is difficult. It’s been the clear winner for over a decade, and it’s natural for investors to flock towards the winners. However, from a portfolio rebalancing perspective, with rising term premia driving US yields higher and tightening rate differentials triggering capital repatriation into Asia, we think investors should be thinking seriously about how they can hedge against US underperformance. Emerging markets, in particular, stand to benefit in this scenario.

You can read the full report here