The US dollar has been strengthening in the past few months and remains a good bet for Asian investors, because it still has another 3-5% upside before it stabilizes.

“No two cycles are the same, but borrowing from the previous dollar cycle in the late 90s and early 2000s, a reasonable working assumption is that we have another 3-5% upside. At that time the dollar index was around 47% and we’re now at 40%,” said Tai Hui, managing director and chief market strategist at J.P. Morgan Asset Management.

At present, a lot of emerging market (EM) currencies, particularly Malaysian ringgit, Mexican peso, and Turkish lira, as well as developed market (DM) currencies, like Canadian dollar, euro, and pound sterling, are still at the lower end of the 10-year range versus the US dollar.

From an asset allocation perspective, for investors with a six-month investment horizon, allocating to DM equities provides a better risk-reward ratio than equities in general. For investors with a one-year to two-year horizon, and who have stronger risk tolerance, it is suggested that they also allocate to EM equities to take advantage of the more attractive EM valuation.

For DM equities, a well-diversified portfolio consisting of US, European, Japanese, Canadian, and Australian equities, is recommended.

“I will advocate a well-diversified portfolio of DM equities. US equities seem to be a very obvious place to be for good reasons. The US economy is growing well, its recession risk has been pushed further down the line, the cyclicals that have been trading behind us are now starting to catch up. So an active portfolio of US equities is reasonable, but from a broader term, markets are pricing in 10-12% EPS growth for S&P as a whole,” said Hui.

Due to the bright prospects for the US, the markets are currently understating the prospects for European equities, although these markets have been growing steadily since 2015.

“I think this is particularly important for Asian investors because a lot of the news we see here from Europe is typically not great, terrorist attacks, politics, etc. What you don’t see is that the growth environment in Europe is actually improving. Unemployment is falling, consumption is holding up. We’re holding on to the view that Europe can still deliver especially with the weaker euro, with US growth improving. Europe is in a good position to benefit from a US recovery,” said Hui.

“We can still construct a case for DM equities, but it’s a more diversified portfolio of different regions, rather than just the US. We also recommend a more cyclical tilt, with more industrials, more materials, and financials, because growth is stable with upside risk, and that’s typically good for cyclicals,” said Hui.