The Dollar Is Crumbling, And Hedge Fund Analyst Says A New Global Trade Is Brewing

As the U.S. dollar has slumped to its lowest level in over two years, emerging market stocks rallied in near-perfect inverse fashion—a trend that may be just at its early stages.

The iShares MSCI Emerging Markets ETF EEM, which holds more than 800 EM stocks, posted its ninth consecutive daily gain—the longest streak since the fund’s inception in 2016—reaching levels last seen before Russia's invasion of Ukraine.

“As an investor, I want to operate under the assumption that… the dollar is going to be devaluing," Otavio Costa, macro analyst at Crescat Capital, said in an exclusive interview with Benzinga.

"You want to buy natural resources, you want to buy hard assets, but you also want to buy emerging markets in a big way,” he added.

The US Debt Problem Is Now a Dollar Problem

At the core of Costa's view is the widening gap in interest payments between the U.S. and its developed peers.

The U.S. spends about 5% of its gross domestic product on interest—when combining federal and local levels—far exceeding developed peers like Germany, Japan, and Canada, where interest costs are about 1%.

Because the U.S. has far less fiscal flexibility, Costa believes it will be forced to cut rates more aggressively than other economies.

For Costa, the implication is clear: “That's going to translate into interest rates differentials contracting and causing the dollar to fall."

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US Valuations Are Stretched, EM Stocks Look Cheap

Costa emphasized the valuation gap between U.S. and emerging market equities.

"The Cyclically Adjusted Price-to-Earnings (CAPE) ratio of the U.S. is about 35, one of the highest in history. You look at Brazil, and it's about 12." he said.

"Why would you not deploy capital there?”

Costa sees emerging markets, hard assets and undervalued foreign equities as the likely beneficiaries of this rotation.

He sees particular value in Brazil, not just in equities but in fixed income as well. "In Brazil, the equity market looks attractive, the bond market looks very attractive," Costa said.

Among developed markets, Costa is particularly bullish on Canada. He sees the Canadian dollar—historically linked to oil and natural gas—on the verge of a breakout, fueled by its commodity exposure and underweight positioning in global portfolios.

"The Canadian dollar is a contrarian play that could benefit from U.S. weakness and commodity strength," he said, adding that Canadian mining companies could also enjoy capital inflows.

He added that capital markets are already signaling a shift.

"Argentina starts doing well all of a sudden after politics changes… India is doing quite well. Japanese equities doing better than the U.S. Now you're seeing European equities outperform U.S. equities."

"These things are just starting to occur," he said. "They're big moves."

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Image created using artificial intelligence via Midjourney.