The Point

How to identify emerging markets benefitting from a weaker US dollar

A weaker US dollar is creating support for emerging-market equities – but not all countries will benefit equally.

The US Dollar Index – which measures the USD against other major currencies – is down about 10 per cent this year.

EM returns have historically been strongest when the US dollar is weak, because servicing US-dollar debt becomes cheaper; domestic purchasing power in EMs improves; and cheaper imports help keep inflation under control, creating room for rate cuts.

Still, while EM performance lifts as the US dollar weakens, the effect is uneven and investors should be discriminating in country selection, cautions Pendal’s EM team.

Economies with a current account deficit – common in Latin America and South-East Asia – benefit most from cheaper borrowing, lower imported inflation and stronger consumer demand.

But big exporters that run a surplus such as Taiwan and Korea can face headwinds as their products become more expensive in US-dollar terms.

Pendal’s emerging markets team remains bullish on Brazil despite latest tariffs

Despite ongoing tariff uncertainty, Pendal’s emerging markets team remains positive on the outlook for Brazil.

Early this month the US imposed sweeping new tariffs on dozens of countries.

Brazil received a special mention from President Trump, with an additional 40 per cent tariff taking the total to 50 per cent for most Brazilian imports.

But some sizeable exemptions will limit the effective tariff rate to around 30 per cent, says Pendal’s EM team in a new note.

Civil aircraft, fertilisers, pig iron, orange juice and mining exports are largely protected.

“We remain positive on the outlook for Brazil and Brazilian equities,” says the team.

“With a relatively strong economy, attractive valuations and the support of a weaker US dollar, Brazilian equities and the Brazilian real have both performed well this year.

“We see the conditions for this to continue, irrespective of challenging headlines.”

Emerging markets: Why Korea requires caution despite strong recent performance

“We are now in a global environment that looks like a broad bull market in emerging market assets,” writes Pendal’s EM team in its latest monthly article.

However, investors still need to be picky at the country level, the team argues. Korea is an example.

“Historically in these environments, individual emerging markets often experience violent short-term, up-and-down moves as part of a trend of the broader asset class moving higher.

“That’s definitely what it looks like in Korea.

“The second quarter saw MSCI Korea rise 32.7% in USD terms, with the Korean Won’s 8.9% move up against the US Dollar contributing significantly.”

But the stronger Won is a drag on exporters – the backbone of the Korean economy. Meanwhile, first-quarter GDP growth was stagnant and local politics remains unpredictable.

While Pendal’s EM team holds some of the best-performing Korean stocks, overall, it sees more opportunity in Brazil, Mexico and South Africa.

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