‘Volatility in emerging markets has come down over time, making them a more attractive place for people to deploy capital,’ says Ninety One’s Dan Morgan
After decades of exceptional dollar strength and a year of geopolitical uncertainty, market participants have recently questioned how much longer the US dollar can hold its place at the center of global finance.
Dan Morgan, analyst in the multi-asset team at Ninety One Asset Management, believes the tide may finally be turning, though not all at once.
“When we think about the dollar and its role that it plays in markets, it's important to think about it in the context of the kind of the long cycles that the dollar goes through,” he said, emphasizing that the dollar has historically followed long, 10- to 15-year cycles, and that previous conditions signaling a reversal are now aligning. “Calling the turning point in these cycles is tricky but what we think is that you need a confluence of different forces coming together,” added Morgan.
Among those forces, Morgan highlights growing global discomfort with the dollar’s weaponization, particularly in its use to enforce sanctions on countries like Russia and Iran. This geopolitical unease, coupled with concerns about US fiscal irresponsibility and institutional erosion, is prompting institutional investors to rethink their exposure.
“The institutional situation in the US has made some sectors and some economies uncomfortable about having too much exposure to the dollar so the Trump administration has really brought both of those kinds of areas of geopolitics really to the forefront. Obviously, it's an administration which is prepared to be very aggressive on the international stage so that brings those concerns to the fore, particularly when it comes to having so much control over the world's reserve currency,” said Morgan.
He added, "It's also an administration who have enacted policies which are not fiscally responsible, certainly over the long run and have also shown a willingness to play fast and loose a little bit with some of the institutional structures of US governance… I don’t think those things cause wholesale flight from the dollar but at the margin for some players, they have an influence."
Moreover, Morgan outlined four primary forces that are shaping long-term currency trends: geopolitics, divergences in economic growth and policy across regions, capital flows influenced by those divergences, and extended valuation imbalances that eventually self-correct. While the geopolitical element has been well discussed, he believes the more significant shift now is in global growth dynamics. Notably, for the past 15 years, growth and investment opportunities have been heavily concentrated in the United States. That concentration, however, appears to be breaking down, he said.
He sees a broader distribution of growth emerging globally, with stronger equity and currency performance first appearing in Europe and then extending into emerging markets. According to Morgan, this trend suggests capital is beginning to follow those new opportunities. As growth prospects widen geographically, capital flows are likely to shift accordingly, potentially leading to long-term changes in currency valuations.
Morgan views this as a medium-term development that will unfold over the next five to ten years but also noted that current market behaviour already reflects early signs of this transition. As a result, he argues emerging markets are benefiting from both long‑term structural improvements and short‑term cyclical tailwinds.
He pointed to better governance, stronger institutions and higher‑quality growth as developments that have been building for years, even if they were overshadowed by the strong US dollar and dominant US equity performance in the previous cycle.
As Morgan suggests, “volatility in emerging markets has come down over time, making them a more attractive place for people to deploy capital.”
He also noted that diversification advantages have improved, not only relative to domestic and US holdings but also across the wide range of economies within the emerging market universe. Consequently, he believes this cycle is shaping up favourably for institutional portfolios.
“The outlook remains bright,” he said. “From the perspective of a Canadian investor, I think it's really that kind of combination of attractive returns and attractive diversification, which can really add something to a portfolio.”
With monetary policy easing broadly, both within emerging markets and globally, growth forecasts are being revised higher while inflation projections continue to move lower. Morgan views that mix as unusually supportive, noting investors now see “decent growth” paired with contained inflation.
When it comes to monetary policy, Morgan sees Canada and the US in broadly similar positions, with both central banks aiming to support their economies through easing. In each case, he noted the labour market and housing sector have been key pressure points. However, he believes Canada is further along in its rate-cutting cycle, partly due to having more room to move on inflation.
Yet, Canada may be facing deeper labour market challenges than the US, though both countries are dealing with muted hiring and a reluctance among employers to make major staffing changes. This has created a fragile but relatively stable employment environment, said Morgan.
One key difference he highlights is the impact of tariffs. While tariffs have been a drag on growth in both countries, they have tended to lower inflation in Canada, whereas in the US, they’ve pushed it higher. That disinflationary backdrop has given the Bank of Canada more flexibility to act.
Ahead of next month’s Fed rate decision, Morgan expects the effects of previous rate cuts to start showing in economic data. However, if growth doesn’t respond as expected, he believes the Bank of Canada still has room to ease further, as inflation is not a binding constraint at this point.
While he remains cautious of what comes next, he sees the current policy direction tilting towards easing, with central banks likely to stay on that course unless new risks emerge.
“There's still a fair amount of uncertainty,” he said.
