2021 Insight

A Less-Than-Almighty Dollar Could Boost International Equities US government stimulus and low interest rates could weaken the dollar and help international equities finally outperform.

WHETHER IT WAS BY LUCK OR BY DESIGN, IF YOU HAD THE FORESIGHT TO HOLD ONTO YOUR OLD VINYL RECORDS WHILE EVERYONE ELSE WAS SELLING THEIRS FOR PENNIES, YOU’RE UNDOUBTEDLY PRETTY HAPPY NOW. Likewise, who have continued to hold onto their international equities despite a decade of underperformance may be on the cusp of finally being rewarded for their patience thanks to a weakening dollar. For a variety of intricate reasons, non-US have tended to outperform domestic equities during nearly every recent period of dollar weakness. Conversely, periods of relative dollar strength have tended to favor domestic outperformance. The 5-year monthly rolling returns for US versus international equity returns between 1975 and 2020 illustrate this notable correlation (FIGURE 1).

FIGURE 1 International Equities Have Tended to Outperform When the Dollar Is Weak US Equity vs. International Equity 5-Year Monthly Rolling Returns US Outperforms 20

15 US Dollar 9.8 years

Key Points 10 The US dollar’s recent bout of 5 weakness versus other major global currencies may be 0 providing fresh for cyclical, international, and -5 emerging-market equities. -10 For several decades, Relative Performance (%) -15 a strong correlation International Outperforms -20 has existed between ’74 ’76 ’78 ’80 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 ’00 ’02 ’04 ’06 ’08 ’10 ’12 ’14 ’16 ’18 ‘20 weak-dollar periods and Years international equity outperformance. Sources: Morningstar, FactSet, Russell, MSCI, and Hartford Funds, as of 12/31/20. US Equity While it’s often difficult is represented by S&P 500 Index. International Equity is represented by MSCI World ex to pinpoint the precise USA Index. The chart20 shows the values of the S&P 500 Index’s returns minus the MSCI impact of currency World ex USA Index’s15 returns. When the line is above 0, domestic stocks outperformed fluctuations on the profits international stocks.10 When it is below 0, international stocks outperformed domestic stocks. of foreign companies, US Past performance does5 not guarantee future results. Indices are unmanaged and not investors in foreign assets available for direct investment.0 For illustrative purposes only. can sometimes gain an -5 advantage from currency FIGURE 1 also shows-10 that the dollar’s relative value has gone through a series fluctuations. of multi-year bull-and-bear-15 cycles dating back to the early 1970s. The dollar -20 (as measured by the’74 DXY’78 US’82 Dollar’86 Index)’90 ’94 has’98 had’02 three’06 ’10 -term’14 ’19 cycles of weakness since 1970 (1970-1980, 1985-1995, and 2003-2011) as well as an equal number of strong-dollar cycles (1980-1985, 1995-2003, and 2011 to early 2020).

1 Insight

But there are signs the dollar’s most recent bout of weakness may be providing fresh momentum for cyclical, international, and emerging-market equities. With COVID-19 It’s safe to vaccines fueling optimism for a worldwide economic recovery, some investors may now say that one find themselves tempted to take a closer look at foreign opportunities at a time when currency’s other nations’ currencies are rising in value versus the dollar. While most economists wisely caution against simplistic explanations for the cyclical weakness logically nature of international outperformance, it’s safe to say that one currency’s weakness becomes a logically becomes a rival currency’s strength. For example, the same weak US dollar that rival currency’s raises the price of foreign imports for US customers (think German cars or French wines) is also likely to lift the purchasing power for holders of foreign currencies—at least for strength. those consumers and companies that happen to be in the market for US imports priced in dollars. Likewise, US investors in foreign assets can directly benefit from currency fluctuations. If, for example, a hypothetical US were to buy 100 shares in Nestle S.A. for 100 Swiss francs (CHF) apiece at an of $1.05 per CHF, the investor’s stake is initially worth USD$10,500. But when the dollar weakens, making the Swiss franc equal to $1.13 (while the Nestle share price stays the same), the investor’s initial 10,000-Swiss- franc investment is now worth USD$11,300—a gain of USD$800. It’s often difficult to pinpoint the precise impact of currency fluctuations on the profits of foreign companies. Global supply chains, varied product offerings, uneven exposure to dollar-denominated trade, and currency-cost hedging strategies all have an impact on company profitability. That said, investors who in the past have paid attention to the dollar’s historical value cycles have often benefitted from allocations to international and emerging-market equities (see FIGURE 2).

FIGURE 2

The Dollar’s Impact on Equity Asset Classes 2001-2020 Average Annual Net Returns (%)1

Equity Asset Class Strong Dollar Weak Dollar S&P 500 Index2 5.43 13.49 MSCI EAFE Index3 -2.67 18.04

MSCI ACWI ex USA Index4 -3.06 20.69

MSCI Emerging Markets Index5 -2.38 33.23

Source: MSCI and Hartford Funds. See back page for index and net-returns definitions. The Dollar: Past, Present, and Future Notably, as the US economy recovered from the Global Financial Crisis (GFC), investors flocked to the relative safe haven of the US dollar, boosting its value. But the coronavirus pandemic prompted the imposition of rock-bottom interest rates by the Federal Reserve (Fed), helping to knock the dollar on its heels by more than 10%. As the Fed lowered interest rates, investors searched for better yields from alternatives to US bonds. With the Fed currently committed to continued low interest rates for an indefinite period, and with the Biden administration pushing a Democratic-controlled US Congress for trillions of dollars in stimulus and infrastructure spending, investors have already started bidding up the value of more risk-on global currencies, putting greater downward pressure on the dollar.

2 Insight

One important question for investors: Did last year’s drop in the dollar represent the start of a new five- to 10-year weak-dollar cycle? A number of analysts think it’s a strong The dollar possibility. slump may be “I believe the dollar will continue to weaken,” says Nanette Abuhoff Jacobson, managing providing a rare director and multi-asset strategist at Wellington Management Company LLP and global investment strategist for Hartford Funds. As in other recent weak-dollar investment opportunity for cycles, Abuhoff Jacobson foresees more capital moving to risk-on markets such as Brazil, active managers to Europe, China, and Japan. Corporate borrowers in some of these countries have been find international using US debt extensively to their economies; a weak dollar now makes those loans less expensive to repay—providing a modest updraft to their bottom lines. equity winners. FIGURE 3 Weak Dollar-Strong Dollar: There Are Benefits to Both

A Strong Dollar Benefits... A Weak Dollar Benefits...

Non-US investors in US capital markets US investors in foreign markets

Domestic- and foreign-based companies Emerging markets with US debt that sell mostly to US-based consumers

US buyers of foreign goods and services Big multinational companies

Investors in US fixed income Countries that export commodities

US tourists traveling abroad US employment

It should be noted, as the post-GFC era showed, that the dollar remains the world’s foremost reserve currency and continues to be the safe harbor of choice in times of significant turbulence. That said, the current dollar slump may be providing a rare opportunity for active managers who know where to find the potential international equity winners in a world eager to move past the pandemic.

FIGURE 4 US Investors Are Underweight International Equities

International Equity

13

Source: Investment Company Institute. As of 12/31/20.

And here’s one more reason investors may want to consider increasing allocations to international: The typical US portfolio exposure to international equities sits at just 13% (FIGURE 4). A weaker dollar could be the tailwind international equities need to finally catch up to US equities after a decade of underperformance.

3 Insight

Hartford Mutual Funds

Global/International Equity A C F I R3 R4 R5 R6 SDR Y Hartford Schroders China A HSHAX HSHCX HSHFX HSHIX HSHRX HSHYX Hartford Climate Opportunities HEOMX HEONX HEOFX HEOIX HEORX HEOSX HEOTX HEOVX HEOYX Hartford Emerging Markets Equity HERAX HERCX HERFX HERIX HERRX HERSX HERTX HERVX HERYX Hartford Global Impact HGXAX HGXCX HGXFX HGXIX HGXRX HGXSX HGXTX HGXVX HGXYX Hartford International Equity HDVAX HDVCX HDVFX HDVIX HDVRX HDVSX HDVTX HDVVX HDVYX Hartford International Growth HNCAX HNCCX HNCFX HNCJX HNCRX HNCSX HNCTX HNCUX HNCYX Hartford Schroders International SIDVX HFYCX HFYFX SIDNX HFYRX HFYSX HFYTX SIDRX HFYYX Multi-Cap Value Hartford International Opportunities IHOAX HIOCX IHOFX IHOIX IHORX IHOSX IHOTX IHOVX HAOYX Hartford Schroders International SCVEX HSWCX SCIEX SCIJX HSWYX Hartford International Value HILAX HILCX HILDX HILIX HILRX HILSX HILTX HILUX HILYX Hartford Multifactor International HMIFX HMIRX HMISX HMITX HMIVX HMIYX

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1 Net returns reflect reinvested net of withholding taxes but Investors should carefully consider a fund’s investment objectives, reflects no deduction for fees, expenses, or other taxes. risks, charges and expenses. This and other important information 2 S&P 500 Index is a -weighted price index is contained in a fund’s full prospectus and summary prospectus, composed of 500 widely held common stocks. Indices are which can be obtained by visiting hartfordfunds.com. Please read unmanaged and not available for direct investment. it carefully before investing. 3 MSCI EAFE Index (Europe, Australasia, Far East) is a free float- Neither MSCI nor any other party involved in or related to compiling, adjusted-capitalization index that is designed to measure developed computing or creating the MSCI data makes any express or implied market equity performance, and excludes the US and Canada. warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties 4 MSCI ACWI ex USA Index is a broad-based, unmanaged, market hereby expressly disclaim all warranties of originality, accuracy, capitalization-weighted, total return index that measures the completeness, merchantability or fitness for a particular purpose with performance of both developed and emerging-stock markets, respect to any of such data. Without limiting any of the foregoing, in excluding the U.S. no event shall MSCI, any of its affiliates or any third party involved 5 MSCI Emerging Markets Index is a free float-adjusted market in or related to compiling, computing or creating the data have any capitalization-weighted index that is designed to measure equity liability for any direct, indirect, special, punitive, consequential or any market performance in the global emerging markets. other damages (including lost profits) even if notified of the possibility Important Risks: Investing involves risk, including the possible loss of such damages. No further distribution or dissemination of the MSCI of principal. • Foreign investments may be more volatile and less data is permitted without MSCI’s express written consent. liquid than US investments and are subject to the risk of currency Mutual funds are distributed by Hartford Funds Distributors, LLC (HFD), fluctuations and adverse political, economic, and regulatory Member FINRA. Advisory services are provided by Hartford Funds developments. These risks may be greater, and include additional Management Company, LLC (HFMC). Certain funds are sub-advised by risks, for investments in emerging markets or if a fund focuses in a Wellington Management Company LLP. HFD and HFMC are not affiliated particular geographic region or country. with any sub-adviser. WP583_0221 222564

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