Gundlach – When the Dollar Heads Lower, Emerging Markets will Outperform

Jeffrey Gundlach’s highest conviction investment idea is that the dollar will head lower over the long term. That will lead to a strong rally in emerging equities, and they will outperform U.S. stocks.

He is neutral on the dollar in the near term. But it is headed “much lower” in the years ahead, he said, and he has started to get “a little bit more negative on it.”

The DXY (“Dixie” dollar index) could go below 70 (it was at 92 on the day he spoke), “but that doesn’t mean it will happen this year,” he said.

Our trade deficit has grown since the onset of the pandemic. The combined budget and trade deficits (the “twin” deficits) are growing as well, which is bearish for the dollar. Gundlach is looking for the dollar to head lower, perhaps in 2022, and that will be the time for investors to allocate to emerging markets.

Emerging markets have grossly under-performed in the U.S. Over the past decade, emerging market equities (based on the EEM ETF) returned 4.84% annually, versus 16.30% for U.S. equities (based on the SPY ETF). Over the past year, emerging markets returned 18.64%, versus 33.20% for U.S. stocks.

Gundlach said he will be a “strong advocate” of emerging market equity buying when the dollar moves to the downside.

Gundlach spoke to investors via a webcast, which he titled “Johnny 7,” and the focus was on his flagship total-return fund (DBLTX). Slides from that webcast are available here. Gundlach is the founder and chairman of Los Angeles-based DoubleLine Capital.

The title was a reference to a toy, marketed in 1964, that resembled a military gun. It consisted of seven different weapons, and Gundlach said those were symbolic of the massive efforts and spending programs launched by the Fed and Congress since the start of the pandemic.