Equities to Rise Not Just on Asia Tech: 3-Minute MLIV

Key Concepts

• Equity Outlook (2026): Focus on growth as the primary driver of returns.
• Growth Dispersion: The significant difference in equity market returns based on economic growth rates.
• Dollar/Euro Exchange Rate: Analysis of potential movements and influencing factors, including positioning and historical trends.
• Positioning Data: Examination of asset manager and leveraged fund holdings as indicators of market sentiment.
• Hedging Ratios: Understanding their impact on currency valuations and normalization effects.

Equity Market Outlook & Growth Expectations

The primary focus for the equity outlook in 2026 is growth. While current consensus estimates project 4-9% growth for the year – aligning with historical averages – this figure is considered relatively cautious given the broader economic context. The speaker emphasizes a strong correlation between economic growth and equity market returns, highlighting a significant “dispersion” in returns. Specifically, years with strong growth typically see average positive returns of 17%, as observed in the previous year. Conversely, negative or recessionary growth periods result in negative returns.

Given the expectation of continued monetary and fiscal ease (expansionary policy in the US), the speaker suggests a bullish bias, anticipating returns exceeding 10% – a scenario that historically occurs 60% of the time. This contrasts with a potentially more conservative consensus view.

Dollar vs. Euro – A Shifting Landscape

For European investors, the dollar’s strength negatively impacted US investment performance last year, and a similar situation was anticipated for the current year. However, the speaker believes this dynamic is less pronounced now. The analysis centers on the dollar-euro exchange rate, noting that consensus expectations predict dollar downside against the euro. This expectation is viewed with skepticism, as dollar downside versus the euro has only occurred less than 50% of the time in the past nine years, suggesting a potential “catch-up” trade is being priced in.

Positioning & Historical Comparisons – Euro Vulnerability

Current market positioning reveals a significantly “long” bias towards the euro, particularly among leveraged funds. This positioning is at levels not seen since 2018, which coincided with a peak in the euro’s trade-weighted index followed by a two-year decline during the latter part of the Trump administration. This historical parallel raises concerns about potential euro weakness over the next one to two years. The speaker suggests that the extent of further bullishness priced into the euro is limited, considering growth prospects and central bank expectations.

Hedging Ratios & Long-Term Considerations

The speaker points out that a key driver of dollar downside in the previous year – rising hedging ratios – has now normalized. This normalization removes a significant factor supporting dollar weakness. Both near-term and long-term considerations suggest potential downside for the euro, partially driven by this catch-up trade and the limitations of further bullish sentiment. The speaker questions how much more bullishness can realistically be priced into the euro given the broader economic and policy environment.

Logical Connections & Synthesis

The discussion logically progresses from a broad equity market outlook driven by growth expectations to a specific analysis of the dollar-euro exchange rate. The positioning data and historical comparisons serve as supporting evidence for the argument that the euro may be overvalued and vulnerable to weakness. The normalization of hedging ratios further reinforces this perspective.

The core takeaway is that while consensus expectations lean towards dollar downside and euro strength, a more cautious and potentially bearish outlook on the euro is warranted, based on historical trends, current positioning, and the normalization of key market factors. The emphasis on growth as the primary driver of equity returns suggests a generally positive outlook for equities, but with a nuanced view on currency dynamics.