The US dollar continues to weaken, and Florian Neto, Head of Asian Investment at European asset management company Amundi, stated that in recent months the firm has observed investors’ confidence in the US dollar as a safe-haven currency weakening, as well as a breakdown in the correlation between the US dollar and US Treasuries. This has led to capital first flowing from the US to Europe, with some funds now shifting from the US to Asia.
He explained that some investors are attempting to diversify their portfolios by switching from US Treasuries to Asian local currency bonds, noting four consecutive weeks of capital inflows into Asian local currency bonds. These investors are mainly institutional investors.
As for equities, Neto said the company has observed a return of funds to Taiwan, South Korea, and India since April. Korea’s new government announced plans to roll out more measures favorable to equity investors, attracting US$4 billion (RM16.779 billion) of capital back to Korea in June; funds have steadily flowed into Taiwan in the second quarter due to its strengths in technology and artificial intelligence (AI); and after seven consecutive months of large outflows from India, a small amount of capital is returning because of stock earnings revision.
He mentioned that at present, the movement of capital from the US to Europe is more pronounced than the flows into Asia, mainly because European investors are shifting funds from the US to Europe. This is due to Germany undergoing unprecedented fiscal expansion, Europe investing in defense to achieve strategic autonomy, and the European Central Bank cutting rates eight times in a row.
● Dollar Expected to Continue Depreciating, Entering a Bear Market
The firm believes the US dollar will depreciate further and is at the start of a structural bear market. Although the pace of depreciation is not rapid, it will gradually decline. This means Asia’s foreign exchange markets will maintain considerable resilience, so the firm believes investors will put more into Asian markets.
However, Neto believes that if previous high tariff rates are restored, economic growth will slow and the risk of recession will reappear. In such an environment, the firm believes investors will not heavily invest in Asia and will seek to continue holding equities in developed and domestic markets.
● Diversification Out of US Treasuries Began at Start of Year
Neto also stated the company began diversifying out of US Treasuries at the start of this year, and Moody’s downgrading the US sovereign rating in May further accelerated the process to avoid being caught off guard.
He revealed that the company’s current holdings in US Treasuries hover between 10% and 15%. Unless concerns about US Treasuries rise, they will maintain this proportion. He added that the company has sold off some US Treasuries, reallocating investments to Australian, UK, and European sovereign bonds, and that Korean and Chinese government bonds could be attractive investment options.