Q2 2025 Investment Outlook: The Waning Cycle of US Dominance
Wed May 07 2025
D๏ปฟear readers,
Markets are in a holding pattern, but the current consolidation is less a sign of strength and more a calm before another leg down โ particularly for US assets and the USD. Beneath the surface, structural forces are in motion that could reshape portfolio allocations for years to come.
From USD Strength to Structural Rebalancing
For the past few years, the USD has been the backbone of portfolio performance. Life insurers, asset managers, and global allocators have leaned heavily into USD-denominated assets, benefitting from carry, spread compression, and capital appreciation. In many cases, FX exposure was left unhedged โ a reasonable position during a USD bull run. But that trade is showing fatigue.
The risk is no longer just cyclical, it's structural. Recent tariff rhetoric and the broader rise of US mercantilism โ including export controls, industrial policy, and increasingly politicized trade โ are forcing a rethink among Asia-based allocators. The implicit message to global markets: the US is no longer a predictable steward of globalization.
Currently, USD-based assets account for over 70% of the average Asian institutional portfolio. A move toward 55% over the next 5 years isn't just plausible โ itโs likely. USD assets still dominate portfolios, but the direction matters more than the level. That kind of shift would mean the reallocation of multiple billions for both currency and global asset flows.
Rethinking USD Exposure
With the US weaponizing its economic policy toolkit, exporters and asset managers in Asia are beginning to hedge their long-standing USD overexposure. Life insurers, in particular, face a double bind: their massive stockpiles of US bonds (Treasuries and corporate debt alike) were built on the back of strong dollar assumptions. But with a declining dollar, unhedged positions could turn from safe havens into sources of capital erosion.
FX-driven returns have flattered performance in recent years โ but that support is eroding fast. The next leg of the cycle is about preserving purchasing power, not squeezing out the last bit of USD yield.
Strategic Positioning: Avoid the Chase, Rebuild in Local Terms
Donโt chase the rally. The AI-driven melt-up in US equities and the late-cycle euphoria around mega-cap tech offer poor risk-reward at this point. The better opportunity lies in structural rebalancing โ into local currency assets and real assets.
Currencies: TWD, SGD, CHF, EUR, and JPY look set to outperform as capital slowly rotates out of USD-centric holdings. THB and KRW may also benefit, though more selectively.
Fixed income: Local currency sovereigns and IG credit offer a more attractive hedge-adjusted yield in many cases โ especially as duration risk in US assets becomes increasingly binary depending on Fed and fiscal noise.
Real assets: Gold and uranium remain top of the buy list. In a world thatโs becoming multipolar โ both geopolitically and financially โ these assets provide duration, diversification, and optionality.
Chairman