The strength of the U.S. dollar and the ongoing war in Europe will hamper North American and other global institutional investors in 2023, though some will still find value in other continents, according to a new report from the Capital Group Inc.
“Even if you think economies outside Canada and the U.S. are headed for more trouble, there are still important reasons to consider investing in international and emerging markets companies,” wrote its authors.
The report identified the strength of the U.S. dollar, which has gained eight cents on its Canadian counterpart in the past year, as a major headwind facing institutional investors looking outside of North America. “The greenback has soared in recent years due to the relative strength of the U.S. economy, generally higher interest rates in the U.S. and the dollar’s perceived safe-haven status.”
According to the report, Jens Søndergaard, a currencies analyst at the Capital Group, said the dollar’s gains may be reversed in the coming months. “These conditions won’t last forever. Once the [U.S. Federal Reserve Bank] stops raising rates and, perhaps, starts cutting again, the stage could be set for a reversal of the dollar dominance we’ve seen over the past decade. As the global economy picks up steam, pro-cyclical currencies should benefit and that may also provide a more supportive environment for international equities.”
The report also said the challenges facing European economies may hold back local businesses but that many, particularly multinational ones, are unaffected by regional turmoil. It recommended investors pay more attention to company-specific events driving returns. As an example, it pointed to the French-domiciled aeroplane manufacturer Airbus, which is expected to deliver 700 commercial aircrafts this year, 200 more planes than its U.S. domiciled competitor, the Boeing Co.