Asset owners mull rebalancing equities on dollar risk

Tactical global investors are anticipating a possible unwinding of the trend of US equities outperforming the rest of the world, amid speculation that the dollar will weaken further.
Asset owners mull rebalancing equities on dollar risk

While global investors, including Asia Pacific's sovereign funds, are rebalancing their portfolios based on the current uncertain outlook for US markets, there is speculation that a sea change may be about to take place in the status of the US dollar.

Jimmy Chang, chief investment strategist at multi-family office Rockefeller Capital Management in New York, said in a circular issued on September 8 that "the market is starting to push-back against the profligacy of a debt-financed free lunch by driving the greenback lower".

For much of the last few months, with the Fed "effectively underwriting Washington’s debt-financed spending spree with impunity", he said inflation and bond yields were both subdued, the US dollar was in high demand and financial assets were rallying "with investors contorting themselves to justify higher valuations".

Jimmy Chang

However, with pre-election nervousness increasing, if the downward spiral of the dollar accelerates, it could create a vicious cycle and trigger concerns about the greenback’s reserve currency status.

"Foreign investors may unload US Treasuries, forcing the Fed to defend the currency by scaling back its ultra-loose monetary policies. This would in turn drive Treasury yields higher and pull the rug out from under the equity market."

Chang said the recent surge in precious metal and gold mining stocks indicated that some investors had started to hedge against this potential outcome.

Many global investors hedge much of their currency exposure, so the actual fluctuations of currency are not the major concern. Although, as Jang Dong-Hun, CIO of Korea’s Public Officials Benefit Association (Poba) told AsianInvestor, “a weaker dollar reduces our hedging costs, which is a plus factor for our return".

Overall, Poba doesn't try to invest purely based on currency considerations, Jang said. “However, I think the dollar could weaken further, based on previous movements over the long term. At Poba, we are increasing our overseas investments, but FX movement may not affect our direction.”

And as Michael Block, Australian Catholic Super’s CIO, told AsianInvestor, “it also depends whether returns are measured in local currency or in US dollars. For example, if the Australian dollar rises against the greenback from 55 cents to 72 cents, then a 30% rise in the price of a stock in USD equates to no increase in the price of that stock in Australian dollars.”

Thus a weak US dollar can push USD stocks higher in USD without any increase in their price in other currencies.Nonetheless, the level of the US dollar does have an impact on the equity performance of global equities.

Chang’s point is that “the declining US dollar may enable global and non-US equities to finally outperform the S&P 500 Index.”

“And yes, many of us are awaiting an unwind of US equities outperforming the rest of the world,” said Block.

However, he also noted that most US stocks are still well below their pre-Covid peaks. “The outperformance of US stocks is down to a very narrow group of companies, predominantly tech/growth stock and not the broad market.

As reported, it appears that many major global equity indices are fully valued. The Nasdaq is the outlier, with tech stocks going way beyond historic measures such as cyclically adjusted price-to-earnings ratio (CAPE).


Some investors like the NZ Super Fund, who invest for maximum return for a reasonable level of risk, are able to make tactical switches into equities, as they did earlier this year.

Matt Whineray,
NZ Super

NZ Super announced on Thursday (Sept 10) that it had underperformed its benchmark reference portfolio for the year ended June 30. In common with other sovereign investors, such as Australia's Future Fund and Singapore's Temasek, NZ Super suffered from the sharp falls in equity markets in March and April. The actual portfolio returned 1.73% compared to the reference portfolio, which returned 3.82% for the year.

“Our long-term horizon meant when risk sentiment was at its lowest, we could lean into market opportunities via counter-cyclical strategies. The fund added significantly to its equity and credit positions as markets fell and has progressively reduced those positions as markets have recovered," said NZ Super CEO Matt Whineray.

The Hong Kong Monetary Authority adopts a similarly prudent asset allocation framework, with diversified asset classes. A spokesperson for the HKMA told AsianInvestor, "There is a certain degree of flexibility under this framework that allows appropriate fine-tuning in response to market changes. However, we do not comment on the details given the market-sensitive nature of the information."

Japan's GPIF was similarly tight-lipped about its tactical shifts, for fear of moving the market.

Rockefeller’s Chang contends that an extended bear run for the US dollar could see it spiral out of control, at which point, foreign investors may start to bail of US treasuries. That would put the dollar status as a reserve currency in the balance.

UniSuper CIO John Pearce isn’t buying that. “To invoke Mark Twain, I think the rumours of the death of the US dollar as the world’s reserve currency have been exaggerated,”  he told AsianInvestor.

Currency is a zero-sum game, he said. “So where do you go, if it’s not US dollar? The RMB can’t replace it with a closed capital account. That leaves euro, yen or gold. No, thanks.”

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