Equities: Record allocation sustains Dollar exposure – BNY

Geoff Yu at BNY reports that global equity allocations have reached a record share of portfolios, with United States (US) markets dominating both equity and fixed-income holdings. Yu sees recent Dollar-selling from equity rebalancing as a healthy correction but expects the structural rotation toward equities to persist, with shifts likely within regional and sector allocations rather than back into bonds.

Structural rotation keeps stocks dominant

"We acknowledge near-term downside risk to global equity allocations, but the data suggest the rotation of the past three years is structural. In January and February, markets focused on the “debasement trade” as falling U.S. real rates weakened Treasury demand and encouraged more dollar hedging."

"The U.S. accounts for 64% of global equity holdings and 73% of fixed income holdings. Because equity hedge ratios are typically lower, global portfolios carry an additional upward bias to dollar exposure. For non-U.S. investors, increasing dollar hedges is the cleaner way to reduce the U.S. contribution to portfolio volatility."

"This is preferable to cutting U.S. allocations outright or rotating further into U.S. and global fixed income. Credible alternatives to U.S. assets remain limited, while bonds are likely to stay under pressure until inflation softens enough for markets to remove further rate hikes from the curve."

"We expect central banks to pivot back toward growth at the earliest opportunity, with lower real rates likely to form part of that shift. Beyond dollar hedging, this should support rotation into economies that benefit from a softer dollar, particularly EM with less exposure to concentrated AI themes."

"Global allocation is unlikely to swing decisively back toward fixed income. The more important shift may come within equities, where the regional and sector mix could change materially."