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Going global may benefit U.S. dollar investors
One might think that the diversification benefits of global investing would be minimal, as trade and financial ties bring the world closer together. However, the global economy remains far from synchronized. This divergence may create buying opportunities for investors and enhances the ability to manage risk through diversification. U.S. investors have a unique advantage, as U.S.-based economic events play an outsized role in global financial markets.
The U.S. dollar offers advantages
With the U.S. dollar serving as the global reserve currency, its strength has benefited U.S. investors in times of international market stress. In 2021 and 2022, the world’s major currencies underwent a major re-alignment due to differences in GDP growth, inflation and central bank policies. The euro ended this period 20% higher than its long-term average against the U.S. dollar, the yen ended 27% higher and the pound sterling was up 37%. These excessive currency movements made non-U.S. dollar assets significantly cheaper for U.S. investors.
The scale of the current misalignment is exceptional. The U.S. dollar has not traded at values so high versus the euro since the euro’s post-launch depreciation 20 years ago, its strength against the yen matches levels following the Louvre Accord in the 1980s and the dollar is trading at an all-time high versus the British pound.
This currency advantage may lead to an outsized impact. For example, over the medium term, U.S. investors in UK markets may benefit from falling property values (a buying opportunity) with an additional currency premium of more than 10% as seen in the currency exchange chart.
A city-focused approach may enhance diversification
Historically, major global real estate markets have offered significant diversification benefits to U.S. investors, even versus broad entities like the European Union or Asia. Focusing on key developed markets with low real estate market correlations with the United States – such as the United Kingdom, Germany, Australia and South Korea — may enhance this opportunity.
Nuveen’s approach goes one step further to focus on cities, targeting acquisitions in what we believe are the most vibrant markets. For example, some cities have a very high correlation (Atlanta and Sydney), while other pairings have a low correlation (Atlanta and Berlin, Seoul or Copenhagen).Global investing requires local market knowledge, currency strategies and knowledge of the legal and financial systems. But it can provide important opportunities to manage volatility, hedge risk and enhance return potential.
Diversification is a technique to help reduce risk. It is not guaranteed to protect against loss.