Written by: Global Thought Leadership | March 16, 2018
Source: Bloomberg, March 15, 2018. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.
The chart shows, between January 1, 2013 and March 15, 2018, the rise and fall of the MSCI Emerging Market Indexes in both US Dollar and local currency terms, along with the rise and fall of the U.S. dollar.
THE BOTTOM LINE
There’s growing concern about the fate of the U.S. dollar among investors in Emerging Market (EM) equities, largely based on to concerns that a falling dollar could hurt EM stock returns.
But recent history suggests that the story is more complex, and more interesting.
Over the past five years, beginning in January 2013, a rising dollar has been accompanied by rising returns for EM, with one notable exception -- the 8-month period from May 2015 to. Feb 2016. After that, EM equities rose strongly, whether the dollar rose or fell.
A surprising detail: this held true for EM equities priced in both dollars and local currencies, both before and after the slump.
Explanations abound -- from a shift in the mix of industries in emerging markets away from resources toward the more dollar-driven technology sector, to positive developments in specific countries with large index weightings.
Whatever the explanation, it’s clear that the dollar isn’t linked to EM equities in the way many have previously believed.
Bottom line: it takes a knowledgeable, experienced investor to avoid falling into the trap laid by broken assumptions, and to potentially benefit from, rather than falling victim to shifts in underlying fundamental factors. And active investing is one place that this sort of judgement can potentially deployed to investors’ advantage.
Active management does not ensure gains or protect against market declines.
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