Investors brace for life after the US dollar 

A world where the US dollar is no longer the reserve currency seems increasingly likely by the day, and institutional investors are wary that it could fundamentally change the way they construct portfolios. 

At the Top1000funds.com Fiduciary Investors Symposium, Bridgewater Associates head of portfolio strategist group Atul Lele said one cause of the de-dollarisation trend – where the greenback’s status as the world’s main reserve currency is challenged – is the so-called “modern mercantilist” trade policies.  

“[Modern mercantilism] is the idea that governments are really looking after their own sovereignty as their number one priority; seeing trade deficits as being something that is a transfer of wealth to other nations; and seeing the need for national champions to come back,” he told the symposium in Singapore, adding that one of its latest manifestations is the US tariffs. 

US equities make up 70 per cent of the MSCI World Index and need strong capital inflows to maintain that status. But Lele said investors may be less willing to put their money into the market given restrictive new trade policies.  

“One thing that’s for sure is that capital moves quicker than trade,” Lele said.  

“The US trying to enforce a number of these policies is something that could be an accelerant towards funds not only not continuing to invest their marginal dollar into the US, which is a negative pressure on the US dollar, but also potentially pulling out.”  

Another force behind de-dollarisation is political conflicts, Lele said.  

“[After the] confiscation of US assets from Russia, you immediately saw not only Russia’s holdings shift away from US Treasuries to other assets, but the rest of the world starting to shift as well,” he said. 

“That was accelerating a path that was already underway from countries such as China, who were moving away from the US dollar into assets such as gold. 

“The question becomes, what do we actually trade in if we’re not going to be trading in US dollars?” 

Planning ahead 

CPP Investments’ head of portfolio design and construction, total funds management, Derek Walker, said that it’s not easy to scenario plan around de-dollarisation. 

“The scenarios we run capture some elements of that [de-dollarisation possibility], but I think it’s a really challenging one to work that all the way through,” he said. 

“We are trying to capture – in the scenarios that we’re running – different states of the world that are more disrupted than the current one, but maybe not to that extreme like a major de-dollarisation of the [world] economy.” 

For example, CPP Investments would examine different allocations and asset class relations in a world with stable inflation and growth, as well as in a world with higher inflation and more volatile and lower growth.  

But Bridgewater’s Lele said a lot of investors today are making a big bet on a continuation of the past 10+ years of a pro-corporate, pro-liquidity, pro-growth, disinflationary boom and period of global harmony. Understanding different regimes is critical, as investors seeking portfolio resilience need to think about the probabilities of a range of investment outcomes and be conscious of which scenario they are betting on. 

“[Investors] are saying, probabilistically, we are keeping our allocation the way it is, a 70/30 global portfolio, [then] they’re making a bet that you’re going to see a repeat of what is amongst the top 5 per cent of performances going back over the last 100 years.” 

“So building resilience includes: number one, thinking about what resiliency means to you; number two, recognising the full range of outcomes that you can get and where your vulnerabilities are; and number three, starting to pull the levers that you can pull to mitigate those vulnerabilities. 

“These are the things that really start to impact the path of your returns over time.” 

Also presenting on the panel was Man Keung Tang, managing director of macro strategy at Singapore’s Temasek.