Investor Discussions - Can Emerging Markets Rise with a Strong Dollar and Rising Rates?
Wealth & Pension Services Group
William Kring, CFP, AIF - Chief Investment Officer
Matt B. Bailey, CFA, CMT - Senior Portfolio Manager
Can Emerging Markets Rise with a Strong Dollar and Rising Rates?
Lately, we’ve come across some questions related to EM, the U.S. dollar (USD) and U.S. rates. Specifically, can the emerging markets (EM) perform well in an environment where the USD and U.S. interest rates are rising? The short answer is yes, but it’s complicated.
First, many EM currencies appear to have bottomed relative to the U.S. dollar earlier this year. Furthermore, EM currencies can move higher against the USD even as the highly publicized U.S. dollar (DXY) index strengthens.
Second, rising rates are a headwind for EM countries but shouldn’t cause too much disruption unless the Fed starts aggressively raising. If growth does pick up and rates move higher, the emerging market may perform well as they are highly levered to global growth. Either way, the outlook is positive.
Lastly, one of the main drivers of EM asset prices is foreign investment flows. After many years of large outflows, the trend has reversed and investors are starting to return.
Looking ahead, the emerging markets still face headwinds but seem to be improving. They’ve underperformed developed markets for nearly five years but that tide may be turning. If that’s the case, we may be in the early innings of a bull market.
As always, please feel free to contact us with any questions you may have.
William Kring, CFP®, AIF®
Chief Investment Officer
Matt B. Bailey, CFA®, CMT®
Senior Portfolio Manager
Source: JP Morgan.