Following a year of dollar strength the tide appears to be turning, which could boost ‘anything that has underperformed’ in recent years.

The latest inflation and economic data suggests that the era of the strong dollar may be coming to an end, with a big potential impact on multi-asset portfolios.

Earlier this month, US inflation came in below expectations at 3% in June, causing the dollar to lose ground against other major currencies. As a case in point, last Thursday the pound rose to its highest level in a year, briefly surpassing $1.30.

The euro has also continued to rebound modestly since mid-April, when some were even talking about the Eurozone currency falling to dollar parity.

Time will tell if this is the start of a new trend for the greenback. What is clear is if dollar weakness is here to stay, it will have profound implications for a number of markets and asset allocation decisions in turn.

Andrew Wilson, chief investment officer at Lockhart Capital Management, suspects the US rate-cutting cycle could start as early as this month. Failing this, he expects to see at least one rate cut by the end of September.

‘This inflection point in the rate cycle is crucial for investor sentiment towards many asset classes: from smaller companies, emerging markets, to the value style of investing,’ Wilson explained. ‘They all have the potential to outperform.’

So far, the team at Lockhart has not proactively added to asset classes that stand to benefit from a softening dollar but would consider increasing commodities exposure at some point in the future.

‘Essentially anything that has underperformed over the last few years could be interesting going forward, like smaller companies, emerging market equity and debt, and ex-US global equities,’ Wilson said.

Extract from Citywire – 22 July 2024