Our positioning: Weak US dollar creates opportunities

The US dollar is on a downward trend. Given its continued overvaluation and the economic policy uncertainties in the USA, this trend is likely to continue for the time being. We’re increasing our position in emerging market equities and currency-hedged gold.

Historically, emerging market equities in particular have benefited from a weak US dollar.

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

Currencies1 month in CHFYTD in CHF1 month in LC YTD in LC
Currencies
EUR
1 month in CHF
–0.8%
YTD in CHF

–0.8%

1 month in LC
–0.8%
YTD in LC
–0.8%
Currencies
USD
1 month in CHF
–3.0%
YTD in CHF
–12.1%
1 month in LC
–3.0%
YTD in LC
–12.1%
Currencies
JPY
1 month in CHF
–4.0%
YTD in CHF
–5.6%
1 month in LC
–4.0%
YTD in LC
–5.6%
Equities1 month in CHFYTD in CHF
1 month in LC YTD in LC
Equities
Switzerland
1 month in CHF
–1.1%
YTD in CHF
8.9%
1 month in LC

–1.1%

YTD in LC
8.9%
Equities
World
1 month in CHF
0.3%
YTD in CHF
–2.9%
1 month in LC
3.4%
YTD in LC
10.5%
Equities
USA
1 month in CHF
1.0%
YTD in CHF
–5.7%
1 month in LC
4.1%
YTD in LC
7.4%
Equities
Eurozone
1 month in CHF
0.1%
YTD in CHF
14.4%
1 month in LC
0.9%
YTD in LC
15.3%
Equities
United Kingdom
1 month in CHF
–1.0%
YTD in CHF
6.5%
1 month in LC
1.5%
YTD in LC
11.8%
Equities
Japan
1 month in CHF
–3.5%
YTD in CHF
–4.9%
1 month in LC
0.5%
YTD in LC
0.7%
Equities
Emerging markets
1 month in CHF
–0.1%
YTD in CHF
2.2%
1 month in LC
2.9%
YTD in LC
16.3%
Fixed income1 month in CHFYTD in CHF
1 month in LC YTD in LC
Fixed income
Switzerland
1 month in CHF
–0.8%
YTD in CHF
–0.6%
1 month in LC

–0.8%

YTD in LC
–0.6%
Fixed income
World
1 month in CHF
–2.1%
YTD in CHF
–6.4%
1 month in LC
1.0%
YTD in LC
6.5%
Fixed income
Emerging markets
1 month in CHF
–1.1%
YTD in CHF
8.9%
1 month in LC
–1.1%
YTD in LC
8.9%
Alternative investments1 month in CHFYTD in CHF
1 month in LC YTD in LC
Alternative investments
Swiss real estate
1 month in CHF
0.1%
YTD in CHF
4.5%
1 month in LC

0.1%

YTD in LC
4.5%
Alternative investments
Gold
1 month in CHF
–3.7%
YTD in CHF
11.6%
1 month in LC
–0.8%
YTD in LC
27.0%

Our positioning – Swiss focus

LiquidityTAA old TAA new
Positioning
Liquidity
CHF
TAA old
4.0%
TAA new
1.0%
Positioning
Neutral
Liquidity
Money market CHF
TAA old
0.0%
TAA new
0.0%
Positioning
Heavily underweighted
Liquidity
Total
TAA old
4.0%
TAA new
1.0%
Positioning
Heavily underweighted
Equities
TAA old TAA new
Positioning
Equities
Switzerland
TAA old
23.0%
TAA new
23.0%
Positioning
Neutral
Equities
USA
TAA old
8.0%
TAA new
8.0%
Positioning
Heavily underweighted
Equities
Eurozone
TAA old
4.0%
TAA new
4.0%
Positioning
Neutral
Equities
United Kingdom
TAA old
2.0%
TAA new
2.0%
Positioning
Neutral
Equities
Japan
TAA old
2.0%
TAA new
2.0%
Positioning
Neutral
Equities
Emerging markets ex China
TAA old
5.0%
TAA new
6.0%
Positioning
Overweighted
Equities
China
TAA old
2.0%
TAA new
3.0%
Positioning
Overweighted
Equities
World value
TAA old
2.0%
TAA new
2.0%
Positioning
Overweighted
Equities
Total
TAA old
48.0%
TAA new
50.0%
Positioning
Neutral
Fixed incomeTAA old TAA new
Positioning
Fixed income
Switzerland
TAA old
17.0%
TAA new
17.0%
Positioning
Neutral
Fixed income
World
TAA old
10.0%
TAA new
10.0%
Positioning
Neutral
Fixed income
Emerging markets
TAA old
6.0%
TAA new
6.0%
Positioning
Neutral
Fixed income
US government bonds 
TAA old
2.0%
TAA new
2.0%
Positioning
Overweighted
Fixed income
Total
TAA old
35.0%
TAA new
35.0%
Positioning
Overweighted
Alternative investmentsTAA old TAA new
Positioning
Alternative investments
Swiss real estate
TAA old
8.0%
TAA new
8.0%
Positioning
Overweighted
Alternative investments
Gold
TAA old
5.0%
TAA new
6.0%
Positioning
Overweighted
Alternative investments
Total
TAA old
13.0%
TAA new
14.0%
Positioning
Overweighted
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