2024-08-28 10:15:01
Investing.com – The downward trend of the dollar could pave the way for “better investment options than Nvidia”, Gavekal Research assessed in a recent report.
The study noted that a weakened dollar could change the investment landscape, possibly challenging the dominance of high-performing US technology stocks such as Nvidia (NASDAQ:).
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The document states that historically, the strength of the American currency has been key to attracting capital to the country’s shares. However, with more accommodative policy from the Federal Reserve (Fed) and expected interest cuts, the currency may lose its appeal.
“The change in the monetary policy of the United States is negative for the dollar”, explains Gavekal, which could lead to a redistribution of global capital.
The company cited three possible scenarios for the dollar and its impact on stock markets. First of all, those responsible for American monetary policy try to weaken the dollar, but they fail. In this case, the US remains the “best of the worst” in the global economy, and capital continues to flow into American stocks, maintaining the strong performance of Nvidia and its peers.
The second scenario predicts that a weaker dollar could increase the profitability of American companies, breaking the historical correlation between a strong dollar and valuable American stocks.
“American stocks continue to perform well, even when the dollar is weakening”, the report emphasized.
The third and most decisive scenario, according to Gavekal, is the continuation of the fall in the American currency, stimulating the flow of capital to other international markets.
In this context, investors could find more attractive opportunities outside of high value stocks like Nvidia, especially if the currency depreciates by around 5% per year.
“Investors conclude, if the dollar is losing 5% per year, other options are more advantageous than owning Nvidia at 75 times earnings or Microsoft (NASDAQ:) at 35 times,” highlights Gavekal.
“So far, the market’s reaction to Powell’s speech is falling between scenarios two and three,” said the firm.
After Jerome Powell’s speech last Friday, the dollar registered a significant fall, and commodities rose. At the same time, the stock markets also appreciated, suggesting some alignment with the second scenario.
At the stock level, however, the outperformance of energy stocks and the outperformance of energy stocks relative to the technology sector indicate a trend toward the third scenario.
If the dollar continues to weaken in the coming days, Gavekal’s strategists believe that the third scenario could prevail.
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