Opportunities on the Horizon: Investing Through a Slowing Economy

thematic updates | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 30 China and crypto aren’t the catalysts for the dollar’s decline Over the decades, we’ve heard numerous spurious predictions of the US dollar’s demise only to see it appreciate. The stories behind a collapse in the dollar typically involve China. Like most other global traders, China has no particular interest in conducting business in US dollars, a currency it can’t control. The crypto world is another dollar naysayer, with a self-interest to promote alternative monetary systems. More than once, crypto pundits have pronounced the sudden end of the US dollar. Of course, an important story that didn’t get much attention was the US government’s decision to freeze much of Russia’s more than $600 billion in foreign reserves. This alerted US antagonists to the potential risk of holding US dollars to bolster domestic currencies. Nonetheless, central bank foreign reserve holdings and the US dollar’s value are very lightly correlated in all but long-term periods. Yet at present valuation levels - and the already deep penetration of the US dollar in portfolios and trade – forward-looking fundamentals simply suggest some unwinding of the US dollar’s past decade of gains. Seeking returns as the dollar declines The Fed’s abrupt tightening cycle and the Russian energy shock sank many currencies to record lows last year against the US dollar. The recent key pain point for Europe was the significant surge in natural gas import costs last autumn as Russian supplies were cut off. This generated a “term-of-trade shock” and a brief economic contraction. Since then, we’ve raised our economic outlook and our allocation for the depressed region with its low expectations (See Recession, recovery: A journey unfinished and Europe: Selective opportunities amid modest growth ) . We expect some emerging markets, including China and Brazil, to ease monetary policy in the coming year. Given the backdrop of US rate cuts in the coming year, this should provide a boost to local markets and economies ( FIGURE 5 ) . We’ve broadened our overweight allocations in recent months to include a wider swath of Asian equities markets. We expect to make additional moves when we see the recognition of US economic risks more fully priced. FIGURE 5 : China Recovery Impacts the Association of Southeast Asian Nation (ASEAN) Equities 0.0 0.2 0.4 0.6 0.8 Japan US Australia Global Germany UK CEEMEA Latam China ASEAN Correlation Regional equity correlation to China Manufacturing PMI 0.18 0.24 0.39 0.39 0.40 0.40 0.52 0.58 0.59 0.61 Source: Bloomberg as of January 31, 2023. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. The Association of Southeast Asian Nations (ASEAN) is a political and economic union of 10member states in Southeast Asia.