The Policy Backdrop

The current administration’s increasingly public tension with the Federal Reserve around interest rates introduces uncertainty around the future path of monetary policy. Markets have recently pulled back from pricing aggressive rate cuts, but the direction of policy still matters. If rates ultimately move lower while inflation remains sticky — a scenario markets have experienced before — investors historically begin shifting toward stores of value. Gold has often been one of the primary beneficiaries of that shift.

There is also a straightforward portfolio dynamic at work. When economic growth slows, dividends compress, or real yields decline, the opportunity cost of holding a non-yielding asset falls. In that environment, gold’s lack of income becomes less of a disadvantage relative to other assets. Lower interest rates also tend to weaken the U.S. dollar, which has historically supported higher gold prices.

Beyond monetary policy, a deeper structural trend is also emerging. Since the Russia/Ukraine conflict, central bank gold purchases have accelerated to near-record levels. The logic is straightforward. Gold remains one of the few reserve assets that sits outside the modern financial system and outside the direct control of any single government.

What Investors Actually Own

A second issue that receives less attention is the structure of the gold market itself.
The global gold ETF market is currently valued at roughly $559 billion. That sits on top of a physical gold market estimated at approximately $29 trillion in above-ground value. In other words, the ETF layer represents only a small fraction of the underlying asset.
More importantly, many ETF investors do not actually hold gold as they believe.
Consider the largest gold ETF, GLD, which holds roughly $147 billion in assets. The trust stores gold through HSBC as its primary custodian, with the potential for additional sub-custodial arrangements. Investors purchasing shares in the ETF are buying an interest in the trust rather than a direct title to specific bars of gold.
In normal market conditions, that structure functions well as a trading instrument. But it is important to understand the difference between price exposure and physical ownership. Most individual investors cannot redeem ETF shares for allocated bullion.
Below the ETF market sits something even larger: the futures market. COMEX in New York handles the majority of global gold futures trading. Open interest reached roughly $261 billion in late 2025. Yet fewer than three percent of those contracts ultimately result in physical delivery. Most are simply financial contracts tied to the price of gold rather than claims on the metal itself.
Periods of market stress occasionally reveal the difference between those layers. During the market disruption in March 2020, premiums on physical coins rose sharply while electronic gold prices remained relatively stable. When financial markets experience strain, paper claims and physical metal can move in different ways.
That possibility is not hypothetical. It is precisely the type of environment gold is meant to hedge.

Most investors access only the upper layers — price exposure, not physical ownership.

Perspective for Investors

It is important to be clear about what this note is and what it is not. This is not a recommendation to buy gold today. Markets move in cycles, and gold itself has experienced long periods of both strength and weakness.
The purpose of this note is simply to encourage investors to understand what they actually own in their portfolios.
Too often in our industry, conversations about assets drift toward buzzwords and narratives. Investors hear the same themes repeated across television, conferences, and publications like Barron’s, but the underlying structure of the investment is rarely examined closely.

For investors evaluating gold exposure, ownership structure matters.
Allocated physical bullion stored in segregated vault storage represents the most direct form of ownership. A bank safe-deposit box is frequently misunderstood; in certain bank failure scenarios, the holder may still be treated as an unsecured creditor.

For investors seeking exchange-listed exposure while maintaining a clearer claim to physical metal, the Sprott Physical Gold Trust (PHYS) offers a different structure. The trust stores allocated bullion at the Royal Canadian Mint and publishes serial numbers for individual bars. The structure avoids derivatives and allows for the redemption of shares for physical metal under defined conditions.

Exchange-traded funds such as GLD and IAU remain useful instruments for investors seeking price exposure. The challenge arises when those instruments are assumed to represent direct physical ownership.
Before allocating capital to gold, investors should ask several structural questions:

If those questions cannot be answered clearly, the investor may be gaining price exposure rather than the systemic hedge gold is often intended to provide.
Gold has always played a role in portfolios because it sits outside the financial system. But that protection only exists if what you own is actually gold. Understanding that distinction is where serious investing begins.

CrossLight Global Investments
This article is strictly for informational purposes only and does not constitute investment advice. CrossLight Global Investments is a registered investment adviser. Past performance is not indicative of future results.

Copyright © 2026 CrossLight Global. All rights reserved.

By CrossLight Global Investment Partners on March 16, 2026.

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Exported from Medium on March 23, 2026.

In the early 2000s, before smartphones and algorithmic feeds, The Chappelle Show aired a skit called “The Player Haters Ball.” It was designed to be absurd and nothing more. Today, it reads less like a joke and more like the world we now recognize.

At some point, political identity stopped being just an opinion. It became a filter through which almost everything is interpreted, from what people buy and listen to, to what they share, to whom they trust, and increasingly, how they invest. What was once a joke has become a pattern. People let frustration or tribal loyalty drive them into choices that have nothing to do with reason or discipline.

Bias creates blinders, and blinders create missed opportunities.

## When Politics Leaks into the Portfolio

We have reached a point where many investors are no longer focused on fundamentals, valuations, macroeconomic conditions, or free cash flow. Instead, they end up responding to politics more than anything that truly drives markets.

Depending on where your loyalties sit, the same data can look like boom or bust. That’s the problem. People project their politics onto markets and call it analysis.

Neither of these is investment analysis. Both are emotional projections onto markets that neither reward nor punish panic or euphoria.

A 2025 study by Cassidy, Vorsatz and Rice linked mutual fund managers’ party registration to their trading behavior. After Trump’s unexpected 2016 win, Republican-majority teams increased high-beta stock purchases, added roughly two percentage points of equity exposure, and saw short bursts of abnormal returns in politically favored high-beta names.

Their Sharpe ratios fell, meaning they were taking more risk for less reward, with no improvement in long-term outcomes. Politics did not make them better investors. It made them less disciplined investors. And that was nearly a decade ago. The partisan imprint on investing is even more profound today.

## The Election Is Doing More Damage Than the Market

Surveys show the pattern clearly:

- 45% of U.S. investors say the 2024 election influenced their retirement decisions more than market performance.

- 33% of pre-retirees became more conservative specifically because of election anxiety.

- 68% of Republicans and 57% of Democrats believe presidential outcomes have immediate and lasting effects on markets.

Pause on that for a moment.

When nearly half the country believes an election, not interest rates, earnings, or growth, is the primary risk to their portfolio, something fundamental has shifted. We are no longer allocating capital with discipline. We are allocating with emotion.

Markets do not reward emotional investing. They punish it.

We should allocate based on expected cash flows, global supply and demand, valuations, interest-rate regimes, and structural risk. Instead, too many investors allocate based on identity, fear, or the desire to see their side vindicated. That is not investing. That is venting. And markets have no patience for it.

My time in fixed-income emerging markets taught me to respect political risk. You don’t ignore it. You closely watch policy, regulation, and geopolitics. But I also learned not to let it drive the whole decision. It’s a piece of the puzzle. It’s not the entire picture.

## From Stock Selection to Seeking Validation

There was a time when people stress-tested cash flows, built dividend discount models, and really dug into the credit. You understood the duration risk on a specific issue because you had to. Today, too many investors take their cues from pop-up gurus on Seeking Alpha, social media personalities with bought blue checks, chaotic Discord chats where everyone talks over each other, or Reddit threads that read more like support groups than research.

This is not an analysis. It is people looking for someone who hates the same things they do and mistaking that for insight.

But here is the truth: politics is emotional, and portfolio management cannot be.

## People at My School Don’t Like Taylor Swift Anymore

This dynamic is not limited to adults. Recently, my ten-year-old daughter, Elise, was humming a tune in the car. I asked her if it was Taylor Swift. She rolled her eyes, as only a ten-year-old can, and said, “No, Dad, people at my school don’t like Taylor Swift anymore.”

Why? They just don’t.

In September 2024, Swift endorsed Kamala Harris. Afterward, Economist and YouGov tracking showed GOP favorable views falling from about 50% to 26%, and unfavorable opinions rising to 67%, with only a partial recovery through 2025. I don’t think Swift changed her music. People changed their feelings. And even kids could feel the shift.

## The Player Haters Portfolio Is a Losing Strategy

People vote with their feelings. They consume with their feelings. And increasingly, they invest with their feelings.

The problem is not with having political opinions. The problem is allowing those opinions to override financial discipline, prudence, and stewardship.

Markets do not care about your ideology, your media diet, or your emotional responses. Markets care about rates, liquidity, earnings, risk, and time.

You don’t need to approve of everything happening in the world to succeed in it. You just need to think clearly.

## In Closing

The Player Haters Ball is funny because it’s exaggerated. Your portfolio doesn’t get that luxury. Your retirement, your kids’ future, your long-term plans, all of it depends on clear thinking, not political heat.

Step away from the noise. Make room for actual opportunity.

---

Tags: Investing, Personal Finance, Politics, Behavioral Finance, Culture

The body is reproduced as published on Medium.

With strong year-to-date performance across EM currencies and equities, and a surprising resilience to global shocks, we believe the asset class is approaching a long-awaited turning point to regain eminence.

In this note, we revisit the evolution of EM bonds as an asset class, assess the factors behind the benign neglect in the past decade, and evaluate the arguments for an imminent revival.

## How EM Debt Became Mainstream

Around the turn of the millennium, EM debt experienced a significant surge and solidified its status as a legitimate asset class. One cornerstone of its ascent can be traced to China, whose WTO accession in 2001 led to a quadrupling of its economy within a decade. Specifically, its infrastructure-centered expansion generated a positive ripple effect on commodity-heavy EM countries. The expansion of global trade, alongside thawing tensions post-Cold War, brought large EM nations to the forefront of the world stage. Russia was a member of the G8 between 1997 and 2014, while the acronym BRICS, referring to Brazil, Russia, India, China, and South Africa, found its way to the economist’s lexicon.

The liberalization of global trade had at least two implications for developed economies. First, low-cost EM producers helped drive down global inflation. Second, accumulated EM trade surpluses were recycled into safe-haven assets, particularly US Treasuries. Both developments, occurring alongside internal weaknesses in advanced countries, namely deflation in Japan and fiscal profligacy in peripheral EU countries, led to an extended period of low or negative yields. Bolstered by a resulting wall of global liquidity, the investment backdrop was thus ripe for risky assets, of which EM debt was one key beneficiary.

As it turned out, a confluence of factors, the adoption of currency flexibility, increased access to local bond markets, and wide interest rate differentials, served to reinforce the value appeal in EM. Favorable economic prospects bolstered the case for currency appreciation. In Asia, the unprecedented currency shock emanating from the 1997-98 financial crisis presented investors with opportunities to acquire assets at a discounted price. A revaluation of the Chinese Yuan in 2005, in tandem with the country’s vastly improved external balance, marked a formal abandonment of its peg against the US dollar. On the other hand, the high-rate environment in Latin America caught the attention of yield-hungry investors. Indeed, so massive were the foreign inflows into Brazil that a financial transaction tax, as high as 6% in 2010-13, was applied at the point of purchase of local bonds.

Historically, the universe of EM debt was centered almost entirely on Latin America. Bank proprietary desks and fast-money traders were the main players. Opportunistic flows, typically aimed at attacking pegged exchange rates deemed overvalued, proved immensely disruptive to policymakers. The turning point came in the late 1990s, when the Asian financial crisis and the Russian default widened the catchment area. As the EM debt universe expanded, long-term strategic investors began to emerge, alongside the spawning of a family of benchmarks. From a high of 85% in 1994, the Latin American share of JPMorgan’s US dollar-denominated EM index has declined to 35% currently. With the investment thesis flipping from “short” bets to “long” allocations, EM debt was thus transformed into a mainstream asset class.

The end result was a win-win outcome. For investors, EM debt offered the benefit of international diversification at a time when the world economy was becoming more integrated. EM policy makers welcomed the shift in the investor base away from “tourist” flows that had exacerbated past boom-bust cycles. A combination of supercharged growth and minimal inflation was a goldilocks scenario for EM. With secular forces ostensibly on the side of EM, it was hard to resist the appeal of the asset class. Indeed, the lovefest proliferated in the aftermath of the global financial crisis in 2008-09, fueled by widespread disenchantment of developed markets.

## When the Music Fades

However, market strength began to falter in the first half of the 2010s. At the risk of oversimplification, this can be attributed to three key developments for EM.

First, after President Xi Jinping took office in 2013, China downshifted its growth target and redirected its policy focus to addressing internal imbalances. To be sure, such concerns were hardly new. In 2007, then-Premier Wen Jiabao had characterized the country’s GDP growth as “unstable, unbalanced, uncoordinated, and unsustainable.” With the benefit of hindsight, extrapolating China’s breakneck expansion post-WTO into the future would inevitably overstate the country’s secular potential. Fears of an economic hard landing have been widespread in recent years, given policy crackdowns on housing and the pursuit of a zero-COVID strategy.

Second, the geopolitical landscape has deteriorated markedly, with Russia’s occupation of Crimea in 2014 marking a turning point. The market impact climaxed eight years later, when the Russia-Ukraine war led to sanctions by the West on Russia and Belarus. Since 2017, select US restrictions on financial transactions with Venezuela and military-linked companies in China have been in place. These changes have a deleterious impact on EM, as they pose operational challenges for affected securities and raise custodial concerns regarding local currency instruments. Concurrently, on the domestic political front, policy heterodoxy began to rear its ugly head in several EM countries, including Argentina, Lebanon, Sri Lanka, and Turkey.

Third, then-Fed Chair Ben Bernanke’s hint in 2013 at a reduction in its bond-buying program stoked investor anxiety; the subsequent spike in Treasury yields triggered significant capital outflows from EM. Figuratively speaking, the so-called taper tantrum pulled the rug out from under the EM smorgasbord, exposing the excesses of market fervor even as global growth decelerated. Notably, the impact was uneven, weighing on countries that were most vulnerable to higher US funding costs. In Latin America, Brazil was especially hard hit by high-profile scandals (state-owned oil company Petrobras) and a series of corporate defaults. The recovery process for foreign investors proved onerous in many instances, raising yet another red flag for the asset class.

It is therefore no surprise that EM developments over the past decade served to deepen skepticism of foreign investors. This has been especially so for US-domiciled investors, as the uninterrupted outperformance of domestic equities vis-a-vis the rest of the world reinforced the home country bias.

## Could This Time Be Different?

At first blush, the incipient interest in EM seems odd, given the absence of critical ingredients for EM debt outperformance: strong growth, geopolitical stability, and easy liquidity. Global trade has been a lynchpin of economic prosperity for EM, since by definition, purchasing power emanates from advanced countries. Uncertainty surrounding the US trade policy will have a negative feedback loop on its EM trade partners. At the same time, international relations have become more intricate and unpredictable. On the monetary policy front, despite the post-COVID tightening being behind us, a reversion to ultra-low rates does not appear to be a plausible scenario, even if the Fed decides to loosen policy later this year.

## The Case for Cautious Optimism

**Our strategic call is premised on the conviction that a gradual drift toward a polycentric world order is underway.** One implication of this regime shift is that it renders previous assumptions less binding.

Admittedly, there are no winners in a trade war. However, the current US-initiated tariff hikes are not widely supported, and retaliatory responses thus far have been relatively restrained. Importantly, we believe key trading partners, particularly the EU, Japan and small open economies in Asia, will work around trade barriers. A case in point is the proposed 12-member Trans-Pacific Partnership (TPP), a regional grouping that was stillborn after the US withdrawal in 2017. But that did not stop the remaining countries from ratifying a modified agreement in the following year. The upshot is that, while there are challenges to a multilateral trading system, regional and bilateral negotiations remain a viable option for countries that rely heavily on free trade. Nowhere is this more evident than in EM countries.

A corollary implication is that, paradoxically, EM inflation risk could turn out relatively manageable. It is worth noting the prevailing deflationary forces in China, in the face of persistent supply glut and a lack of progress in lifting its own domestic consumption. As the world’s second-largest economy, China’s trade linkages with the Global South have increased markedly over the past decade. While the expansion is attributed to shipments of intermediate inputs to low-cost producing countries, rising incomes will position these economies as core consumer markets for Chinese goods in future years.

As it relates to the current standoff in US trade policy, the wild card, we believe, is in financial flows rather than goods exchange. To be clear, the US dollar will likely continue to maintain its dominance as a unit of account and a medium of exchange. However, as a store of value, the outlook for the US dollar has become less certain. Should diplomatic crosswinds persist, the so-called exorbitant privilege of the US dollar could be called into question. Indeed, significant offshore holdings of front-end US Treasuries suggest some degree of rollover risk. We view the recent strength in precious metals as motivated in part by the global search for alternatives to the US dollar.

**More generally, the distinction between EM and developed countries is increasingly blurred.** Historically, the EM narrative has been associated with policy heterodoxy, institutional weakness, and political instability. However, these attributes are now emerging in a growing number of developed countries. As a case in point, in the area of public debt, few, if any, governments can now risk increasing spending without any regard for bond vigilantes, as depicted by the inordinate volatility in the UK Gilts market in 2022. Oddly enough, fiscal metrics in many EM countries have stabilized or even improved, having been subject to market discipline over the years.

## Risks That Remain

What are some factors that could stand in the way of EM? We may underestimate the network advantage of the US dollar. Back in 2011, US Treasuries rallied despite the country losing its AAA rating from S&P. Should global tensions escalate further, the safe-haven attribute of the greenback could reassert itself. Investor distrust in EM could remain deep-seated enough to be overridden by opportunities closer to home. Given a still-uncertain geopolitical outlook amid a global slowdown, fat-tail events in EM could include sovereign defaults, official sanctions, and custodial freezes. Indeed, for an asset class that spans over 70 countries, active monitoring is of paramount importance.

## Conclusion: Reappraising EM Debt

Arguably, the non-monolithic nature of the asset class favors a customized approach that fits an investor’s mandate. With EM having fallen out of favor in the past decade, current investor positioning is light. We believe the time is ripe for reappraising EM debt at this point in the global cycle. Our conviction is that the long-term investor will benefit from relative value and international diversification that EM debt offers.

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*Tags: Emerging Markets, Fixed Income, Investing, Global Macro, Geopolitics*

Crosslight Global Investment Partners. For informational purposes only; not investment advice.

That experience shaped the way I see things today. Because when I look at the U.S. market in 2025, I see something eerily familiar. It feels a lot like the environments I once saw in places people used to call “too risky.”

Rising inflation, debt sustainability concerns, geopolitical flare-ups, currency risk, political dysfunction, liquidity cracks, all of it. These are the same fault lines we’ve seen across the emerging world for decades. The only difference now? They’re showing up in the U.S. and other developed markets.

This article isn’t about doom and gloom. It’s about pattern recognition. It’s about bringing the lessons learned from emerging market investing into today’s conversation. Because if you’ve never seen what happens when policy credibility fades or when liquidity dries up, you’ll want someone on your team who has.

## Inflation: Uncomfortable, Not Uncharted

U.S. inflation remains the top financial concern for households and a persistent risk for markets. In April 2025, Gallup found that 29% of Americans cited inflation or the cost of living as their top concern, for the third consecutive year.

And yet, I can’t help but put this in perspective.

In 2022, Turkey’s inflation surged to 80%. Grocery staples doubled in price. The currency tanked. And the government, after making a series of unorthodox rate cuts, had to reverse course with aggressive hikes to stop the outflows away from the Lira. Brazil did the same in 1999, pushing its Selic rate to 45% after a currency devaluation.

By comparison, the 5 to 6% inflation we’re seeing in the U.S. feels intense, but it’s manageable. That doesn’t mean it’s harmless. When inflation erodes confidence in central banks, markets become volatile quickly. However, emerging markets have shown us that it’s not just about the number. It’s about how you respond.

## Geopolitical Shocks: The Market’s Oldest Blind Spot

Markets don’t price in war until it’s at the front door. However, when conflict arises, it affects everything, commodities, interest rates, currencies, and risk appetite.

That’s not just theory. During Russia’s 1998 default, geopolitical instability and economic mismanagement caused a major crisis. Russian bonds plummeted. Capital quickly moved out. And the contagion wasn’t limited to Moscow. U.S. hedge fund Long-Term Capital Management (LTCM) was so exposed that the Federal Reserve had to organize a bailout to stop a broader market crash.

Fast forward: Russia’s invasion of Ukraine in 2022 caused a commodity shock, triggered sanctions, and sent investors scrambling for safety.

IMF data shows that emerging-market equities decline about 5% per month during major conflicts, more than doubling the drop seen in developed markets. Why? Because geopolitical risk impacts EM more severely. But here’s the catch: as global interconnectedness increases, those same dynamics are affecting Wall Street.

Experience navigating EM shocks isn’t just a niche anymore, it’s necessary.

## Debt Sustainability: The Numbers Are Starting to Rhyme

The U.S. national debt now sits above 100% of GDP. According to the GAO, that number could reach 106% by 2027, with projections as high as 200% by 2047 if nothing changes.

These used to be emerging-market numbers.

Argentina’s 2001 default on $100 billion of sovereign debt was catastrophic, but not a surprise. They had pegged the peso to the dollar, borrowed aggressively, and failed to grow. When the math broke, the country fell into recession, froze bank accounts, and defaulted. Even after multiple restructurings, Argentina has defaulted on its debt nine times in its history.

The U.S. has more tools, yes. But markets care about trajectory, not just destination. If fiscal credibility erodes, investors demand a premium, or they walk. The EM lens teaches you to spot those early tremors.

## FX Volatility: Not Just for Currency Traders Anymore

In emerging markets, currency risk is baked into every decision. But in the U.S., it’s often ignored, until it becomes a headline.

But look around. The dollar’s strength or weakness is shaping global liquidity conditions. High rates here have pulled capital from abroad. A dollar slide could ignite inflation. A dollar surge could break something overseas.

This isn’t theoretical.

During the Asian Financial Crisis in 1997, Thailand’s baht collapsed after the country dropped its dollar peg. Within months, the baht fell 60%, the Indonesian rupiah 47%, and the Malaysian ringgit 35%. Countries raised their rates to defend their currencies, crushing domestic growth in the process. One crack in the system became a regional collapse.

In 2025, the U.S. dollar is at the center of the global web. If volatility spikes, the fallout could be international. EM investors know this dance. We’ve had to hedge, adapt, and move quickly. That muscle memory matters now more than ever.

## Political Instability: It’s No Longer Just “ThEM”

Political dysfunction used to be a reason to discount EM assets. Now, it’s part of the U.S. investment backdrop.

Debt ceiling showdowns. Budget gridlock. An election cycle that feels more like a civil war than a democratic process. Markets are watching all of it.

Morgan Stanley has called out rising U.S. policy uncertainty as a material risk. And rightly so. In 2015, Brazil’s President Dilma Rousseff was impeached amid allegations of corruption and fiscal mismanagement. The result? A stalled economy, falling investment, and whipsawing markets. It wasn’t just political drama. It was a macro event.

The U.S. isn’t immune. And investors are learning that political stability can’t be taken for granted.

## Liquidity Risk: It’s Always the Last Thing You See Coming

In calm markets, liquidity feels infinite. In a crisis, it vanishes.

In March 2020, we saw that even U.S. Treasuries, usually the safest and most liquid investments, can become challenging to trade when too many people try to sell at once. By 2023, both the IMF and U.S. regulators were sounding the alarm that it’s getting harder to buy and sell bonds without moving prices, largely because big banks are holding fewer bonds and markets are becoming more volatile.

As I already said, this isn’t theoretical. In 1998, after Russia’s default, funds dumped anything they could to raise cash. Prices gapped. Volatility exploded. LTCM almost broke the system.

EM managers are trained to survive this. It’s not just about alpha, it’s about survival. When there are no bids, you need conviction, calm, and a plan.

## Final Word: The Markets Have Changed. Have You?

If you’ve made it this far, here’s what I want you to take away:

You don’t need to panic. But you do need to prepare.

Many of the risks we see in developed markets, rising inflation, unsustainable debt, policy uncertainty, currency shocks, and liquidity gaps, are not new. They have occurred for decades in emerging markets. Those of us who have invested through these cycles have developed a mindset of discipline, humility, and effective risk management.

This isn’t about “I told you so.” It’s about offering perspective. Many people are encountering this level of complexity for the first time. EM folks have lived it for years.

So, if you’re building a team, a portfolio, or a plan for what’s next, you want people who’ve been here before. People who’ve managed through volatility. People who know what to do when the headlines get scary and the exits get crowded.

We’re not just in uncertain times. We’re in emerging ones.

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*Tags: Emerging Markets, Global Macro, Inflation, Investing, Fixed Income*

But proponents of the dollar’s demise highlight two threats: first, the threat to its role as a medium of exchange, as reflected by the increased use of alternative currencies for trade settlement, especially for commodity transactions; and second, its reduced appeal as a store of value, given secular trends in the composition of official reserve assets. Admittedly, there has been an increase in the use of EM currencies for settling energy trades. Estimates suggest at least one-fifth of global oil transactions are now invoiced in non-USD currencies. Russia, the second largest exporter of oil, presents a case in point. Among its buyers, China, India and Turkey now pay for Russian oil in yuan, ruble and dirham. Notably, 95% of bilateral shipments between China and Russia are settled in either yuan or ruble. Still, a breakthrough in the yuan as a reserve currency is not imminent, given minimal progress on capital account convertibility since its inclusion in the IMF’s Special Drawing Rights (SDR) basket in 2016.

It is true that the USD share of FX reserves held by global central banks (involving mainly Treasuries) has witnessed a trend decline to 58% last year, down from a peak of 72% in 2001. Over the same period, however, there has been a concurrent accumulation in higher-risk overseas assets by quasi-government agencies (e.g. sovereign wealth funds) and private institutions (e.g. insurance companies) around the world, Asia and Europe in particular. In an environment of quantitative easing, negative interest rates helped spur an insatiable appetite for yield. Given the breadth and depth of US markets, the overall dollar exposure of international investors likely remains significant, in both equities as well as credits. Our prognosis is that the dollar’s status is not at imminent risk of being displaced. While emerging alternatives might over time dilute the dollar influence at the margin, a lethal threat to its hegemony is not in sight.

## Dominance Is Not Strength

That said, currency dominance should not be conflated with currency strength. Indeed, from a strategy standpoint, the cyclical outlook for the dollar appears less constructive, in our view.

First, an extended period of US market outperformance has led to crowded allocations by international investors. The dollar is therefore subject to the whim of unfavorable technicals, should unhedged positions be cut. Such flows could reflect profit-taking, strategy change, or forced selling induced by mark-to-market losses. Specifically, inordinate FX movements, most recently in Taiwan, could trigger an unwind of carry trades, where purchases of dollar assets are funded by currencies with lower rates. Moreover, in US Treasuries, with more than 60% of offshore holdings concentrated in the front-end bucket of 0-5 years, the market could be vulnerable to liquidation upon maturity.

Second, the fundamental theme of US exceptionalism seems to be faltering. The macro policy path has turned markedly less predictable, and has in fact fueled recession fears. Specifically, the lack of clarity on tariffs is likely to exert a toll on future investments, given the cross-border nature of production grids. In fact, it is likely that growth challenges extend beyond manufacturing, with services sectors like tourism and education potentially hard hit. In turn, weaker prospects could accentuate debt sustainability concerns, potentially leading to negative credit actions. Projections by the IMF suggest the US debt-to-GDP ratio could exceed 140% by the end of this decade.

Third, geopolitical headwinds against the dollar are likely to persist. In the absence of credible substitutes, traditional “safe haven” currencies like yen and euro stand to benefit most. The salutary effect could ripple onto select EM currencies as flight-to-quality proxies. Likewise, the diversification appeal for gold in reserve assets ought to gain more traction. On the other hand, the viability of new vehicles remains unclear in the foreseeable future. Crypto alternatives continue to grapple with issues of security and regulation. The proposed BRICS currency is likely to be more theatrics than substance, despite concerted attempts by EM nations to bypass the dollar.

## The Upshot

The upshot of our analysis is that, notwithstanding the emergence of potential challengers, the US dollar will maintain an undisputed lead as a reserve currency over the secular horizon. However, it faces severe near-term headwinds emanating from economic deceleration, geopolitical uncertainty and unsupportive technicals. With the laggard markets outside of the US poised to play catch-up, we see select non-USD assets as offering the twin benefits of value and diversification.

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Tags: US Dollar, Reserve Currency, Fixed Income, Global Macro, Geopolitics

The policy smorgasbord, in turn, is an outcome of increased divergence in growth and inflation trends observed in the post-pandemic period. EM central banks, who were the first to acknowledge the pandemic-induced risk in inflation, initiated the global tightening cycle in early 2021, well ahead of their DM counterparts. The subsequent Russian invasion of Ukraine in February 2022 likely extended the duration of the EM hiking cycle, particularly for Central and Eastern European countries. Nevertheless, with the notable exception of the US, the monetary stance across DM and EM over the past year had begun pivoting in favor of growth. In June, the ECB delivered its first rate cut since 2019. Earlier this month, China surprised markets by trimming key interest rates in the hope of stimulating growth. Alongside Japan, Turkey is an outlier: the central bank in March 2024 lifted the policy rate by +500 bps to 50% to counter stubbornly high inflation.

Arguably, policy decisions have become less correlated even for economies with historically strong ties. The North American trio (Canada, Mexico, and the US) presents a case in point. Last week, the Bank of Canada reduced its policy rate by 25 bps, marking a second consecutive cut after a similar move at the June meeting. Mexico began its hiking cycle in mid-2021, a three-quarter lead versus the US. Between June 2021 and March 2023, Mexico undertook a cumulative tightening of +725 bps, more than twice the pace of +325 bps in the US. Among other factors, this likely helped underpin the MXN’s relative strength over this period.

Absent an unanticipated price shock, the medium-term policy trajectory going forward is biased toward global easing, although a reversion to a generalized low-rate environment of the past is highly unlikely. Specifically, three interrelated factors are likely to drive a continuation of desynchronized monetary cycles. First, trade restrictions and protectionist policies could present a challenge to a sustained trend of disinflation globally. Second, the pivot away from globalization to domestic industrial targeting is vulnerable to a combination of policy lapses and implementation missteps. Third, US election uncertainty means that the market risk premium might stay elevated for now. Indeed, the Fed’s decision to maintain its key rate at close to the current peak may temporarily limit the room for further easings elsewhere without running a risk on their currencies. In this regard, EM countries tend to be more susceptible to capital outflows.

CrossLight expects interest rate differentials to play an active role in driving global asset prices. Given our central conviction that a theme of US exceptionalism will likely prevail through year-end, we see little urgency for the Fed to act for now, except for the purpose of an insurance cut, as the US easing cycle could be shallower than what market participants currently priced in. Given the recent strength in rates, we are cautious about duration and positioned for curve steepening. On the other hand, we advocate accumulating select non-USD assets as value opportunities present themselves in the second half of 2024, favoring countries with supportive fundamentals and carry appeal.

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Tags: Monetary Policy, Global Economy, Interest Rates, Global Macro, Emerging Markets

Regardless, the global investor should welcome the latest developments. Since assuming office ten years ago, Prime Minister Narendra Modi has made economic reforms a key priority. By GDP, India now ranks as the fifth largest and tops four G7 nations (UK, France, Italy and Canada). Last year, it overtook China to become the world’s most populous country. Almost two-thirds of its population are under the age of 35, contrasting the aging demographics in Western Europe and most of Asia. India also stands to benefit from being an alternative to China for supply chain diversification. These secular tailwinds underpin market expectations of India achieving the fastest growth among major economies in the next two years, with the IMF projecting at least 6.5% per annum.

To be sure, the foundation of market liberalization was laid thirty years ago as a response to a balance-of-payments crisis in 1991. At the lowest point, foreign reserves were depleted to barely $1 billion, enough for just three weeks of imports. Turning its back on the post-independence import-substitution model, India adopted market-opening measures by encouraging foreign direct investment (FDI), abolishing import-restraining industrial licensing, and devaluing the currency by 20% to spur exports. India became a member of the World Trade Organization (WTO) in 1995, seven years ahead of China. Since then, the buildup in the country’s external buffer has been nothing short of spectacular. Foreign reserves now stand at a record $656 billion, equivalent to 11 months of import coverage.

Yet, beyond these headline-grabbing achievements, macroeconomic anxiety in India stays high for a couple of reasons. First, whilst a phenomenal expansion in services exports has helped narrow the current account shortfall, the manufacturing trade deficit remains elevated. Thematically speaking, this owes to India’s unconventional transformation from agriculture to services, leapfrogging manufacturing as a result. This stands in contrast with the industry-led experience in China, where massive trade surpluses helped contribute to reserve accumulation. Second, the composition of capital inflows has deteriorated, with increased reliance on the more volatile portfolio inflows amid stagnating FDI. This probably explains the extended time taken for the index inclusion talks, as well as a longstanding official aversion to hard currency sovereign debt issuance. (India is the only country in the EMBIG index without a USD government bond.)

Fundamentally, CrossLight views the case for an allocation to local bonds in India as compelling. The ingredients for continued economic expansion are in place, and the incoming Modi-led coalition government is expected to stay committed to long-term economic priorities. S&P’s move in late May to raise the outlook on the country’s BBB- rating underscores the agency’s constructive view. That said, we would curb market enthusiasm on near-term currency appreciation on the basis of index inclusion since the decision has been well-telegraphed ahead of time in September 2023. Instead, our investment thesis centers on long-term value and diversification and considers bond investing in India as a marathon rather than a sprint.

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Tags: India, Emerging Markets, Fixed Income, Global Macro, Bond Index

On the other hand, export-oriented countries are sometimes accused of seeking unfair trade advantage by suppressing the appreciation of their currencies, through buying large quantities of USD. Herein lies the notion of currency manipulation that is central to the US Treasury’s semiannual report mandated by the US Congress in its Omnibus Trade and Competitiveness Act of 1988. In the last report of November 2023, five of its trading partners in Asia (China, Malaysia, Singapore, Taiwan, and Vietnam), alongside Germany, are on its monitoring list. The next report is due later this month.

Going back to the question at hand, currency intervention is legitimately an operative response to smooth out inordinate market volatility. However, there is weak evidence regarding the efficacy of central bank intervention to dictate or defend a specific level of exchange rate, especially if it is out of line with economic fundamentals. Indeed, frequent interventions could have the opposite effect of undermining policy credibility and risk stoking speculative elements. For a country with a flexible regime, the exchange rate is, at the core, a manifestation of its monetary fiscal policy mix.

CrossLight views exchange rates as presenting both opportunity and risk for the dollar-based global investor. Value hunters in search of under-valued currencies stand to benefit from potential appreciation and/or positive carry from long positions. Conversely, for allocations in countries where exchange rates are trading rich or appear out of line with long-term fair values, currency hedges are imperative in preserving returns in USD terms. In the extreme, a failure to restore currency stability could lead to policymakers swapping capital mobility for quantitative controls. With global rates in a higher-for-longer mode and given geopolitical changes, the currency factor must accordingly be subject to dynamic surveillance and not left to benign neglect.

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*Tags: Emerging Markets, Currency, Global Economy, Exchange Rate, Monetary Policy*

Indeed, with headline inflation resolutely above the 2% target in the past two years, the Bank of Japan in March lifted its policy rate to a range of 0% to 0.1%, from minus 0.1% to 0% previously, effectively ending the world’s last negative rates regime. Barring a brief period from 2006 to 2008, short-term policy rates in Japan have been near-zero or moderately negative since the implementation of a zero-interest rate policy in February 1999. Recent comments from policymakers suggest that incremental tightenings are on track in light of the recent breakthrough in wage negotiations. Companies have committed to base pay hikes of 3.7%, the largest increase in more than 30 years.

Ironically, interest rate hikes are occurring alongside currency weakness, with the JPY down around 9% against the USD in the year-to-date. Moreover, its longstanding status as a safe haven currency now appears less straightforward. Both developments seem counterintuitive at first blush. However, empirical research suggests past risk-off gains in the JPY were driven by portfolio rebalancing activities (such as offshore derivative transactions for both hedging and speculative purposes) rather than relative yield differentials. By design, safe haven currencies typically have low rates (negative, in the case of the JPY) and tend to be under-allocated in normal market conditions.

To be sure, there are economic tailwinds arising from a cheap currency, including bolstering corporate earnings and enticing inbound tourists. That said, trend weakness in the JPY could be problematic in at least three ways. First, the overseas relocation of Japanese manufacturing in the past decades (40% of the total, by some estimates) and the high value-added nature of onshore output have led to a decline in export sensitivity to the exchange rate. Second, the passthrough from higher import prices could accentuate the drag on real household incomes. Third, excessive movements in the currency might erode domestic confidence. Even so, the Ministry of Finance will likely eschew currency intervention as a rule. Policy activism has had limited lasting impact, as demonstrated by official efforts to prop up the JPY in the fall of 2022.

While the disappointing GDP report could rekindle fears of secular stagnation, CrossLight views the Q1 print as an aberration rather than a trend. True, significant structural hurdles remain in Japan, notably demographics. Yet, there are reasons to be optimistic. From a capital flows standpoint, Japan is benefiting from the global shift in geopolitics. In equities, investors’ rotation from China to Japan has helped spur stock prices to post-bubble highs. In direct investments, Taiwanese chipmaker TSMC earlier this year opened its first semiconductor plant in the country. Separately, the progressive relaxation of foreign worker quota is helping to alleviate labor market rigidities. Last year, the number of foreign workers in the country exceeded 2 million for the first time. With the size of its economy neck and neck with Germany’s, these developments augur well for Japan’s economic revival.

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Tags: Japan, Global Macro, Currencies, Fixed Income, Emerging Markets

Indeed, by EM standards, their historical growth records are surprisingly mediocre. In the past three decades, annual GDP growth in Mexico and Brazil averaged 2.1% and 2.4% respectively, well below China (8.5%) and India (6.3%). Interestingly, for Mexico, there is scant evidence of a long-term boost from NAFTA membership over this period. Among other factors, this likely reflected a stubbornly large informal sector domestically, as well as the concurrent emergence of China as a competitor.

Whilst realized growth fell short, secular optimism regarding the global commodity cycle nonetheless fueled market interest in LatAm assets. Investors and rating agencies alike jumped on the bandwagon. Between April 2008 and February 2016, Brazil was rated investment grade by at least one of the three rating agencies. It has since reverted to the junk category (Ba2/BB/BB). On the other hand, Mexico has managed to retain its investment grade status (Baa2/BBB/BBB-), although ratings are off the historical high of single-A.

For bond investors, EM and LatAm are often used, or at least thought of, interchangeably. This owes to the fact that the investable pool was initially concentrated in the region. (In 1994, the benchmark weight of LatAm in the JPMorgan Emerging Markets Bond Index topped 85%.) In the early stages, the investment proposition was primarily value-driven, typically as a result of political uncertainty or economic turmoil. In the post-millennium years, the growth wave emanating from the China boom fortified investor interest. A generalized EM love fest, one that outlasted the Global Financial Crisis, was thus propelled by the twin engine of value and growth.

In CrossLight’s view, the case for LatAm investing is retrogressing toward value hunting. Idiosyncratic country factors are once again exerting a greater influence on asset prices. To be sure, with higher rates globally, a market outcome where a rising tide lifts all boats is unlikely. Instead, there will be increased differentiation based on individual merits. In the wake of Moody’s recent outlook revision to positive, Brazil’s ability to push through reforms will be under scrutiny. The outcome of next month’s general elections in Mexico will have implications for medium-term fundamental trends. As the policy cycle progresses, rate differentials could become more entrenched, and in turn, spawn relative trade opportunities. The upshot is that as with the pioneer participants of EM, a global investor today can benefit from the value that LatAm bonds offer at different points of the market cycle.

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Tags: Latin America, Emerging Markets, Fixed Income, Brazil, Mexico, Global Macro

To be sure, the eye-watering 10.3% average growth achieved between 2000 and 2011 was, in many respects, a result of a rare confluence of one-off factors, notably favorable demographics, trade liberalization and constructive geopolitics. However, rapid expansion within a relatively short period of time has unintended socioeconomic consequences. To address these tradeoffs, the policy design on growth in the last decade has pivoted toward favoring quality over quantity.

Indeed, trends in production factors, particularly labor input, have unambiguously reversed. Working-age population peaked in 2011, while the overall population has begun to shrink since 2022. On global trade, Sino-US tensions have remained rife since the imposition of US tariffs on Chinese imports in 2018. In early April, the USTR initiated investigations relating to China’s dominance in the maritime, logistics and shipbuilding sectors. The ongoing EU probe since late-2023 into China-made electric vehicles is another case in point.

Despite a build-up in structural obstacles, the commitment to the 2020 vision of doubling the country’s GDP by 2035 is tacitly intact on the policy agenda. Achieving this goal would require an average growth of 4.7% per annum between 2020 and 2035. As a back-of-envelope comparison, the IMF expects China’s growth to moderate to 4.1% in 2025 from this year’s 4.6%. Street estimates of potential GDP growth vary but typically converge to around 4%.

All things equal, sustaining long-term growth requires consumption to play a more dominant role, given its economic maturation. Recall that, in the past, the decision by foreign MNCs to establish local manufacturing plants was made not just to benefit from low costs, but also to position themselves for the expansive domestic market. For now, the Chinese economy is mired in a Catch-22 situation, as asset market doldrums and a weak social safety net will constrain household spending.

For now, favoring production over consumption appears to be the official rule. To China’s credit, policymakers have dealt head-on with excesses by shifting the investment focus away from real estate toward new sectors, including high-tech, IT, and green economy. As highlighted earlier, a production-centered strategy is not without challenges, especially given the current geopolitical climate. Consequently, the investment focus will continue to center on at least two trade-related themes: (1) a continuation of a China+1 strategy by MNCs, of which India and Southeast Asia have been key beneficiaries, and (2) the creation of intermediary manufacturing facilities by Chinese firms in countries that are close to the final destination of its exports.

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Tags: China, Global Macro, Emerging Markets, Trade, Fixed Income

Notwithstanding the disappointing GDP print, the US economy continues to hold up well relative to the rest of the world, reinforcing an ongoing theme of US exceptionalism. Indeed, the IMF earlier this month boosted its 2024 US GDP forecast to 2.7% in the latest World Economic Outlook, markedly higher than 1.5% just six months ago. The upgrade is striking, given that the cumulative 525-bp hike in the Fed funds rate during 2022-23 had previously fanned fears of recession, which, to many market punters, would justify monetary easings as early as March this year.

While firm growth itself is not necessarily an obstacle for rate cuts, there is little urgency for the Fed to reverse course until further clarity on inflation emerges. CrossLight’s base case is for the Fed to stand pat on policy through year-end, but we acknowledge the possibility of an “insurance” ease to cushion potential risks to next year’s growth outlook.

To be sure, the notion of US exceptionalism is not new. As recently as 2018, US growth reached a 13-year high of 2.9%, outpacing not only its developed counterparts but also large EM economies including Brazil (1.8%) and Mexico (2.0%). The point is that diverging economic trends are now becoming more of a norm.

As a case in point, while the US continues to grapple with the inflation narrative, China is saddled with the equally problematic issue of deflation. Moreover, in the face of heightened trade frictions, reshoring production closer to the home region is reconfiguring the global production grid that will result in winners and losers.

From an investment standpoint, the higher-for-longer scenario for US rates presents both a challenge and an opportunity for global bonds. As global policy trajectories pivot away from synchronization to differentiation, global investors with a long-term horizon stand to benefit from fundamental price dislocations in a generalized risk-off environment.

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Tags: US Economy, Global Macro, Interest Rates, Fixed Income, Emerging Markets