Multi-Asset Insights
Global Equity Indices Concentration and a Waning Dollar
Key Highlights:
- Heightened concentration risks in equity markets and increasing scrutiny of the US dollar’s dominance are prompting a reassessment of traditional diversification and risk management strategies
- With US equities representing around 70 per cent of traditional global equity benchmarks, investors face increasing valuation, sectoral, and currency risks. This situation calls for the exploration of alternatives to market -cap weighted approaches, each involving trade-offs
- At the currency level, the US dollar’s long-standing dominance is increasingly coming under scrutiny due to fiscal deficits, geopolitical pressures, and shifts in the composition of global reserves. Consequently, investors should consider adjusting their asset allocations to align with a more multipolar currency landscape
Global equities: Rethinking default settings
US equities now account for around 70 per cent of traditional equity benchmarks. The dominance of mega-cap technology stocks has amplified valuation, sectoral, and currency risks, exposing limitations in traditional market-cap benchmarks. As a result, the concentration levels within traditional benchmarks cannot be ignored when designing strategic asset allocations, which must maintain an appropriate level of diversification. As market-cap weighting reveals its limitations as a default setting for benchmarks, we explore alternative strategies based on fundamental, optimal, or risk-based approaches. While these methods offer potential pathways to mitigate concentration risks, they also come with inherent trade-offs that investors need to carefully evaluate.
US dollar’s dominance under scrutiny
The US dollar remains the dominant global reserve currency, but it is facing mounting pressure from widening fiscal deficits, geopolitical tensions, and shifts in global reserve structures. Its traditional safe-haven status has weakened, as evidenced by diminished hedging power during recent market stress events. Central banks are diversifying their reserves, with growing interest in alternatives such as gold and other currencies. While the dollar retains significant advantages that could sustain its role, its long-term dominance is no longer guaranteed – underscoring the potential benefits of reallocation to gold, emerging-market currencies, and non-dollar assets.