UBS: Where to Invest as the Dollar Keeps Weakening in 2021

The US dollar, which slid 7.5% last year against a basket of other currencies, is going to keep on tumbling, according to UBS Financial Services. But for investors, the bank finds, that spells opportunity.

“Expect broad-based dollar weakness in 2021,” even after 2020’s descent, reads a report from Solita Marcelli, CIO Americas, and Jason Draho, Americas asset allocation chief for the UBS unit. They cited factors that have propelled the greenback’s swoon: First, US budget and trade deficits, which are partly financed by foreign investors. Second, the Federal Reserve reducing short-term US rates to near-zero and pledging to keep them down there for some years.

Resurgence among other nations, post-pandemic, is another powerful influence on the dollar’s drop. Citigroup believes the greenback may fall another 20% this year, in part owing to the worldwide optimism engendered by the advent of the vaccines. This, Calvin Tse and other Citi strategists wrote in a report, has dulled overseas investors’ appetite for US Treasuries and other American haven assets, which required the foreigners to exchange their money into dollars to buy.

The UBS report delineates the roller-coaster ride that the dollar took in the past year. Since the beginning of 2018, when President Donald Trump’s tax cuts took effect and goosed corporate earnings, the dollar index was rising. Then, with the onset of the coronavirus last winter, it spiked, as global investors piled into the relative safety of US assets.

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As Congress and the Federal Reserve launched relief efforts, which involved a massive increase in the government’s deficit and ultra-low interest rates, the world soured on the buck. Since late March, it has cascaded almost 13%.

This reversal has one clear loser, which should become increasingly apparent with the expected opening of the world economy once the virus is in retreat. With travel and tourism safe again, Americans will find journeying abroad an expensive proposition.

To the UBS strategists, there are many more winners:

International Stocks, Especially from Emerging Markets. If the dollar declines more, the report stated, then “the dollar-based return to international equity investments goes up because the foreign currency assets can now purchase more dollars.” This was the case from mid-2010 to mid-2011, much of 2017, and the previous six months.

Select US Risk Assets. In particular, equities. Historically, a weak dollar benefits small-caps and economically sensitive stocks. The small-cap Russell 2000 soared 18.4% last year, more than 2 percentage points better than the large-cap benchmark S&P 500. As to economically sensitive sectors, beaten-down banks and energy would rally. And don’t forget US exporters: A puny dollar makes offshore buying American goods and services cheap.

Gold. The precious metal rode along with the fear trade until August, thanks to unease among some about the seemingly willy-nilly stimulus from Congress and the Fed. Since then, gold has ebbed a bit, although it’s up 23% from the start of 2020. As a commodity, the yellow metal is priced in dollars, and any decline in the dollar provides support for it. This should resume up ahead, UBS projects.

Things shouldn’t be as ducky for other commodities, which UBS contends have had their run. The report concluded that “the strong performance of industrial metals and agriculture over the past few months limits their upside.”

Other Currencies. Sophisticated institutional investors who traded currencies could do well in this arena. To UBS, the currencies “with the most medium- to long-term upside potential” include the euro, the Swiss franc, the British pound, and the Australian dollar.

While suffering badly from the virus’ resurgence, industrial powerhouse Germany, as well as others like France, should be in solid economic shape, the thinking goes. The euro, since the dollar’s peak in March, is up 15% against the American currency. Switzerland tends to ride along with the rest of the continent and its denomination has increased almost 6% versus the dollar over the past nine months.

The pound has benefited a lot since the resolution of Brexit differences with the European Union. It’s up 17% since March. And Australia is doing well with the now-booming Chinese economy, which it supplies with raw materials. Australia’s dollar is up 34% compared to the American version.

The Dollar Will Keep Falling, UBS Predicts

Hey, Washington, Buy Gold to Support Dollar, Guggenheim CIO Says

Tags: British pound, Citigroup, dollar, dollar index, Euro, gold, International stocks, small caps, UBS

KEY TAKEAWAYS

Settlement prevents PBGC Multiemployer Insurance Program from incurring more financial stress.
Former arrangement between unions and the pension fund risked increasing costs for participants, and those paying PBGC premiums.
Withdrawal liability payments expected to reduce the amount of PBGC financial assistance required.
Agreement is expected to extend the FELRA/UFCW Pension Fund’s insolvency by more than a year.

The Pension Benefit Guaranty Corporation (PBGC) has approved the merger of two multiemployer pension plans in a move to protect the retirement of approximately 50,000 Washington, D.C.-area grocery and warehouse workers and limit the financial burden on the agency’s multiemployer pension insurance program.

The agreement involves the Food Employers Labor Relations Association (FELRA), the United Food and Commercial Workers union locals 27 and 400 (UFCW), and the FELRA/UFCW Pension Fund. The two primary contributing employers for FELRA are supermarket chain operators Giant and Safeway. In 2013, the two companies, along with the UFCW union, enacted a series of actions that PBGC said undermined the “severely underfunded” FELRA/UFCW plan.

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Giant, Safeway, and UFCW froze benefits under the FELRA/UFCW plan and created a new multiemployer plan for future benefit accruals called the Mid-Atlantic UFCW and Participating Employers Pension Plan (MAP). According to PBGC, this weakened the FELRA/UFCW plan by diverting more than $100 million in contributions to MAP and accelerated the insolvency of the FELRA/UFCW plan. The agency said that without the new settlement, the FELRA/UFCW plan would have become insolvent this month.

Under the new agreement, MAP will combine with the FELRA/UFCW plan, which will be terminated by mass withdrawal, and Giant and Safeway will make withdrawal liability payments to the plan beginning in February for 25 years totaling approximately $56 million annually.

In exchange for the payments, the supermarket chains will be released from further withdrawal liability to the FELRA/UFCW plan. PBGC said the withdrawal liability payments are expected to reduce the amount of the financial assistance that the FELRA/UFCW plan will require from the agency when it becomes insolvent, which is now expected to occur in mid-2022.

“PBGC negotiated this settlement to protect participant benefits and safeguard the agency’s troubled Multiemployer Insurance Program from additional financial stress,” PBGC Director Gordon Hartogensis said in a statement. “Our new agreement delays the FELRA/UFCW plan’s insolvency and also prevents PBGC’s Multiemployer Insurance Program from going broke unnecessarily quickly.”

Hartogensis said the 2013 FELRA/UFCW arrangement threatened to increase costs for PBGC’s Multiemployer Insurance Program, which itself is projected to run out of money by 2026, as well as for participants and employers in the 1,400 other multiemployer plans that pay PBGC premiums.

Dutch grocery retail company Ahold Delhaize, which is the parent company of Giant Food, said the supermarket chain will create a new single employer plan to cover benefits accrued by its associates under the combined plan that exceed the PBGC’s guarantee level following the combined plan’s insolvency. Ahold Delhaize also said that at some time in the next few years Giant intends to exercise its option to withdraw from the new multiemployer plan with Safeway, the fee for which is currently estimated to be approximately $10 million in total.

“With this agreement, Giant Food has significantly de-risked its pension exposure and has improved the security of pension benefits for plan participants,” Ahold Delhaize said in a statement.