The double asymmetry (labour supply, central bank behaviour) between the US and the eurozone has complicated effects on asset allocation. Consequently, it is prudent to hedge the risk of euro depreciation against the dollar and it is also reasonable to overweight equities, private equity and real estate in the eur zone relative to those in the US, in the view of analysts at Natixis.
The labour market situation
“The COVID-19 crisis has driven down the labour supply in the US, but not in the eurozone. We should therefore expect stronger labour market pressures in the US than in the eurozone and, consequently, faster growth in wages and in unit labour costs in the US.”
The central banks’ behaviour
“The Fed wants to exit its highly expansionary monetary policy, albeit cautiously and partially. The ECB, meanwhile, apparently has no intention to exit its policy. Evidently, it wants to use a highly expansionary monetary policy to offset the loss of purchasing power caused by the rise in energy prices, boost the employment rate and facilitate the energy transition.”
So what to expect?
“Monetary policy is likely to be more expansionary for a long time in the eurozone than in the US. This can be expected to result in: Significant bond capital flows from the eurozone to the US and a significant depreciation of the euro against the dollar and a catch-up in eurozone asset valuations (equities, real estate, corporate value) with those in the US, given the eurozone’s more negative real long-term interest rates.”