Hedge fund analyst: The weakening of the US dollar has triggered an investment boom in the international market, and the capital rollover has just begun

The US dollar has fallen to its lowest point in over two years, with funds accelerating their flow into emerging markets. The iShares MSCI Emerging Markets ETF (EEM), which holds 800 emerging market stocks, has risen for nine consecutive trading days, creating the longest winning streak since its establishment in 2016. The index has returned to levels before the Russia-Ukraine war, indicating that a new wave of capital rotation has just begun to unfold in the market.

Dollar Depreciation Driving Risk Asset Revaluation

Otavio Costa, macro strategist at Crescat Capital, told Benzinga that if the US dollar continues to depreciate, investors will actively seek allocation in natural resources, hard assets, and undervalued emerging markets. If people believe the dollar will depreciate, they will want to allocate to assets with intrinsic value, and emerging markets present such an investment opportunity.

Costa believes that the current debt burden in the United States has transformed into a structural problem for the dollar. He points out that interest expenditure by federal and local governments accounts for about 5% of GDP, far higher than the approximately 1% in developed countries like Germany, Japan, and Canada. This means the US has relatively weak fiscal flexibility and may face rate cut pressures faster than other countries. Once the interest rate differential narrows, the dollar could further weaken.

Brazilian Market as a Potential Emerging Market

In terms of valuation, Costa notes that the Cyclically Adjusted Price-To-Earnings (CAPE) for US stocks is already as high as 35, close to historical extremes. In comparison, emerging markets like Brazil have a CAPE of only about 12. He questions why capital shouldn't be allocated to these undervalued markets? He is particularly optimistic about Brazil, not only because of its attractive stock market valuation but also due to the promising returns of its bond market.

Canada May Become a Safe Haven After Dollar Weakening

Among developed countries, Canada is an underestimated potential market. Costa points out that Canada is a worthwhile contrarian investment target. Although not an emerging market, Canada's high correlation with natural gas and commodities presents market opportunities. Costa believes the Canadian dollar has been long underweighted by the market, and with oil and gas prices highly correlated, it may see a catch-up opportunity during a weak dollar and rising commodity cycle.

In fixed income, Canadian bonds are attractive to conservative funds due to their robust yield structure and better inflation control. As the market reassesses risks and returns, Canada may play the role of a safe haven among developed countries.

Global Market Rotation Emerges, Multiple Countries Attracting Capital Attention

Besides Brazil and Canada, Costa also mentioned that Argentine and Indian markets have performed brilliantly recently, especially Argentina, where capital has been flowing back notably after political reforms. In Asia, Japanese and European stock markets have recently outperformed the US, further demonstrating that investment funds are flowing from the overvalued US market to other undervalued regions.

Dollar Breaks Psychological Barrier, Market Bearish Sentiment Heats Up

The US dollar index recently dropped to 98.2 points, its lowest level since April 2022. The market generally believes that former President Trump's remarks about removing Federal Reserve Chairman Powell have intensified market concerns about political interference in monetary policy. Multiple investment banks, including Goldman Sachs, have turned bearish on the dollar, warning that dollar confidence may be damaged, potentially triggering inflation risks.

According to data from the US Commodity Futures Trading Commission (CFTC), institutional investors' net short dollar positions have risen to a new high since 2013, indicating the market has become pessimistic about the dollar's future trajectory.

Emerging Markets and Resource-Based Economies Become Capital Safe Havens

With the dollar weakening, the emerging markets index has recovered to February 2022 levels. Costa emphasizes that the continued rise of US interest expenditure as a percentage of GDP will increase rate cut pressures and further drive capital into emerging markets and resource-based economies like Brazil and Canada, seeking higher returns and hedging risks.

The continued dollar weakness and global capital rotation trend may reshape the investment landscape. Investors should closely observe this trend's development and adjust asset allocation accordingly to address potential market volatility. This article is purely a market observation and not investment advice.