A big theme of 2023 could be the relative weakness of the US dollar relative to other currencies, and the impact of this on markets, according to David Jane, multi-asset investor at Premier Miton.
He said a weaker dollar boosts commodity prices and emerging market economies, and equities in general.
This is because all commodities are priced in dollars, wherever in the world they are bought or sold, so a lower dollar essentially acts as a price cut for commodity buyers in non-dollar economies, which should boost both demand for commodities and also enable consumers to have more cash to spend on other items.
The lower value of the dollar also traditionally boosts emerging market economies as those economies have historically had to borrow in dollars, and so a fall in the value of the dollar should make borrowing costs cheaper.
In terms of what all of this means for equities, Jane said: “If the US is nearing its interest rate peak of this mini-cycle, then potentially the US dollar has peaked this cycle.
"This has broad ranging implications for the relative performance of equity markets and also for commodities. Emerging markets and commodities are typically stronger when the dollar is weak.
"However, the current long-term outlook could be beneficial for the US, at least versus other developed economies. The US is an energy and agricultural products exporter as well as having plenty of other natural resources, such as minerals.
"Its other big advantage is that its workforce is still growing, unlike other big, developed economies. It doesn’t pay to bet against these factors in the long run, however in the short term the US indices suffer from excessively high weights to certain very large companies which are suffering valuation and profit headwinds.
"This may hold the indices back, although many other stocks might be doing well.”
But he does feel that caution is still warranted when it comes to equity exposure, because interest rate rises which have already happened, combined with the deteriorating economic conditions, means company earnings will weaken, with the result that profits will be lower.
He is also sceptical on the outlook for US equities, as he feels that large exposure to technology stocks which won’t benefit from the coming macroeconomic environment and dollar weakness.
Pieter Fourie, who runs a global equity mandate at Sanlam, believes the benefits of dollar weakness on emerging market equities are such that he is happy to be overweight the asset class now, despite many emerging market economies being sensitive to global GDP.
He says: “At the beginning of 2022 multinational growth stocks were under pressure due to their expensive equity valuations: a strong dollar leading to negative earnings revisions and the lasting impact of travel restrictions on revenue acceleration and staff shortages.
"A weakening dollar, fewer travel restrictions and valuation multiples back to relatively attractive levels means we are (more) positive.”
david.thorpe@ft.com
