While the US economy has many positives, the prospect of a decline in the value of the dollar means stocks listed outside of the world’s largest equity market are likely to have more appeal, according to David Aujla, multi-asset fund manager at Invesco.
Aujla said he regarded the backdrop for investors in 2026 to be relatively “constructive”, with central banks cutting interest rates and inflation falling, a scenario he believed would lead to “modest” but positive returns for investors during the year ahead.
While Aujla is positive on equities in general, including US equities, he added: “Within equities, we hold a neutral stance between US and developed ex-US markets, however non-US markets are increasingly appealing, particularly for foreign investors.
“On one hand, US earnings momentum continues to outperform other markets, mostly driven by technology, favouring US equities. On the other hand, our bearish view on the dollar, driven by narrowing yield differentials for the greenback and positive surprises in global growth, is generally seen as a strong tailwind for international unhedged equity exposures.”
The dollar has underperformed relative to sterling over the past year, meaning the returns from dollar-denominated assets have been weaker for US-based clients.
One way to avoid this risk is to buy the hedged share classes of investment funds, or for an investor in direct equities, to hedge the currency exposure.
Aujla’s view is that the dollar is likely to be weaker next year, and therefore that investing in unhedged share classes may offer the best value in the US market.
When it comes to fixed income, he said he had recently increased exposure to credit, and was now moderately overweight to the asset class.
“However, given spreads near all-time lows, the case for risky credit is limited to harvesting higher yields relative to quality credit and government bonds in an environment of improving growth and stable inflation,” Aujla added.
His view on the US dollar also impacts his fixed income exposure.
Aujla said: “We favour emerging market local debt exposure given our more bearish view on the US dollar.”
Local debt exposure means debt denominated in the emerging market currency, rather than in dollars, and the returns to investors are paid in that currency.
david.thorpe@ft.com
