Exchange traded fund investors thinking about international exposure may capture improved growth abroad if the strength in the U.S. dollar slows down.
John Bilton, global head of multi asset strategy at JPMorgan Asset Management, argues on the Financial Times that the dollar strength will not become excessive, which will help reinforce the US expansion and give space for global growth to stabilize or accelerate.
In 2015, currency ETF investors may have noticed that the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) and actively managed WisdomTree Bloomberg U.S. Dollar Bullish Fund (NYSEArca: USDU) slowed down, with UUP up 6.6% and USDU up 7.3% over the past year, after the 2014 through early 2015 surge.
UUP tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. USDU tracks the USD against a broader basket of developed and emerging market currencies.
If the U.S. dollar is starting to peter out, “risk assets accelerate, potentially leading to an eventual change in leadership from developed to emerging market assets,” Bilton said.
Nevertheless, during the early stages of the Federal Reserve tightening cycle, JPMorgan projects the initial rate hikes will support the U.S. dollar – the market is currently pricing two hikes in 2016 and 2017. The strategist also argues that the coming rate rise cycle will likely be shallower and longer than before, which may provide small supports for the greenback.
“Our expectation is for modest further upside to the US dollar in early 2016 as the start of the cycle creates a new high-water mark in global policy divergence,” Bilton said.
Meanwhile, as the U.S. dollar losses steam, investors may turn to overseas economies, notably the undervalued emerging markets.
“As the upside risks to the dollar subside through the year, the outlook for emerging market assets has scope to brighten,” Bilton added. “Simply put — the longer dollar strength persists, the more 2016 will look like 2015, but the sooner the dollar stabilizes, the quicker we will see sentiment recover and emerging economies repair.”
Consequently, some of the most unloved ETFs of 2015 like the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and iShares MSCI Emerging Markets ETF (NYSEArca: EEM) may begin to turn around. Additionally, ETF investors can also take a look at the relatively new JPMorgan Diversified Return Emerging Markets Equity ETF (NYSEArca: JPEM), a smart-beta emerging market ETF incorporates a multi-factor screening process that combines value, momentum and quality factors.
Max Chen contributed to this article.