Emerging markets and the dollar
Bankers who were paying attention as graduate trainees might recall the bond market dance: one arm up, the other down, illustrating “yields up, prices down,” and vice versa.
For EM investors, a similar shorthand is: “dollar up, EM equities underperform.” Sadly, the reverse – “dollar down, EM equities outperform” – hasn’t really applied for the last decade and a half. Until this year.
We explore the long-term relationship between the US dollar and Emerging Market equities over half a century and six distinct phases of dollar strength and weakness. After 15 years of EM equity underperformance, could a weaker dollar herald a renaissance for EM assets? Or will geopolitics, fragmented global trade and disrupted financial flows undermine the story?