Our positioning: Weak US dollar creates opportunities

Financial markets continued to display an air of nonchalance last month. Most government bonds trended sideways, while corporate bonds benefited from a further narrowing of credit spreads. At the same time, stock markets continued their upward trend, with some reaching new all-time highs, at least in local currency terms. Economic uncertainty and the escalating tariff conflict have had little impact so far.

However, the current euphoria could give way to corrections if conditions change. On the one hand, the situation in the real economy remains difficult. Europe continues to lack positive momentum, and there are growing signs of an economic slowdown in the USA. On the other, with the deadline due on 9  July, President Trump reiterated his threats of new punitive tariffs. They are set to come into effect on 1  August and would increase the average tariff burden in the USA from 2.5 percent at the moment to over 20 percent – a substantial increase that’s unlikely to leave the US economy unscathed. Companies will face a choice of either absorbing higher costs through lower margins or passing them on to consumers in the form of higher prices. The latter could fuel inflation, leaving less and less room for further price rises among US stocks. Against this difficult backdrop, we remain underweighted in the US stock market.

US dollar’s downward trend likely to continue

These tougher conditions have so far been particularly evident in the US dollar. It has been in a downward spiral since the beginning of the year, losing around 10 percent of its value on a trade-weighted basis – a considerable devaluation. Investors from countries with stronger currencies such as the Swiss franc are feeling this clearly. Despite new all-time highs on the US stock markets, the dollar’s weakness is weighing on their portfolios. And there seems to be no end in sight. Even after the most recent decline, the US dollar remains overvalued in terms of purchasing power parity. Given Trump’s trade and debt policies, the economic environment also looks set to remain tough for some time to come. This means the dollar’s downtrend is likely to continue.

Purchase of additional emerging market equities and gold

Historically, emerging market equities in particular have benefited from a weak US dollar. This is because export industries in these countries were more competitive when their currencies were directly or indirectly pegged to the US dollar. The threatened US import tariffs will likely do little to change this as essential inputs and raw materials from these countries cannot be replaced in the short term. With this in mind, we’re increasing the weighting of emerging market equities in our portfolio. Besides emerging markets, gold typically also benefits from a weak US dollar. Given the growing uncertainty surrounding trade policy, demand for the precious metal as a safe haven is likely to remain high, if not increase. We’re therefore increasing our gold allocation and hedging this position against a further devaluation in the dollar.

Performance of asset classes

Our positioning – Swiss focus