With the US dollar losing steam, investors are seeing new life in some emerging market equities. A strong dollar in the wake of the Federal Reserve’s rate hike campaign starting in March 2022 has dealt a major blow to emerging markets by exacerbating inflation, raising their debt burdens and raising fears of capital outflows. But the dollar has recently begun to show signs of weakening, with the U.S. dollar index, which measures the greenback against a basket of six major currencies, losing about 6 percent over the past 12 months. The dollar index fell below the 100 level on July 14, marking its lowest level since mid-April 2022. The dollar index was last trading around 101. .DXY 1Y Mountain Dollar under pressure Emerging-market equities likely to outperform developed-market peers, UBS wrote in a note on Wednesday as central bank slowdowns trigger a slowdown in the dollar market. Lower their own rates. “I think you’d be remiss not to mention. [that] If you’re thinking about a weaker dollar continuing, there’s a lift for U.S. investors investing outside the U.S.,” said Shannon Saccocia, chief investment officer at Neuberger Berman Private Wealth. Emerging markets with “significant commodity imports” stand to benefit from a weaker dollar, according to CFRA. is a “significant net importer”. In contrast, exporting countries such as Vietnam benefit less from a weaker dollar, which makes their exports less competitive, Ullal said. Dollar-denominated debt increases the risk of weaker availability of capital in domestic markets and improves the investment climate for domestic companies. Emerging markets sell dollar-denominated debt; as a result, if the dollar depreciates against the domestic currency, it is easier for corporates to pay off their outstanding debt in dollars. “But at the same time, the general funding environment eases, and lenders and capital suppliers tend to be a little looser with funds when the dollar is weak in emerging markets,” said Yung-Yu Ma, chief investment officer at BMO Wealth Management. When the dollar is strong, [that all] tends to contract,” Ma added. ESG play Emerging market equities are currently trading at a significant valuation gap, according to UBS. The Swiss bank found that the MSCI Emerging Markets Index is trading at a near 36% discount to the S&P 500. Strategist Xingchen Yu singled out the stock environment for Latin America, South and Southeast Asia and Central Europe as a “desirable environment.” Yu added that Investors looking at emerging markets should also examine environmental, social and governance factors. He noted that the MSCI EM ESG Leaders Index has underperformed the broader EM benchmark due to regulatory shocks and a shift from value names to growth stocks over the past year. Risks, and that’s a trend we expect to continue.” Yu said. The easiest way to gain exposure to emerging markets is through ETFs. The three largest are: the Vanguard FTSE Emerging Markets ETF, the iShares Core MSCI Emerging Markets ETF and the iShares MSCI Emerging Markets ETF. Core MSCI is up 9.6% in 2023, iShares MSCI Emerging Markets is up 8.2% and Vanguard FTSE Emerging Markets is up 7.4%. EEM YTD Mountain EEM in 2023 — CNBC’s Michael Bloom and Sarah Munn contributed to this report.
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Source by [CNBC News]
