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Emerging Markets
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
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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
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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.
Find out more here
The positive feedback loop we’re expecting to see in emerging market economies
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The positive feedback loop we’re expecting to see in emerging market economies
‘Emerging markets crisis’? That’s a wildly overstated view, say our experts
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‘Emerging markets crisis’? That’s a wildly overstated view, say our experts
Some analysts have described a pattern of a weaker dollar and rising bond yields in the US as a ‘classic emerging markets crisis’.
“As veterans of actual emerging crises dating back to 1994, we consider that view to be wildly overstated,” writes Pendal’s EM team in their latest analysis.
In spite of volatility and weakness in core US financial markets, the currencies of almost all emerging markets strengthened against the US dollar in March and April. Meanwhile bond yields fell for the majority of major EMs.
“Emerging markets are driven by two major global drivers: international capital flows and international trade.
“A weaker dollar represents capital flowing out of the US and into the rest of the world – and a weaker dollar has consistently been positive for emerging markets over the past 30 years.
“Although evolving tariff policies threaten a downturn in global trade, the message from financial markets is that investor uncertainty about US economic policies is a clear positive for emerging economies and for investors in emerging markets.”
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Emerging markets: Which countries are best-suited to these market conditions
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Emerging markets: Which countries are best-suited to these market conditions
Samir Mehta: The role reversal driving equities in China and India
Why our emerging markets team believes the asset class could be entering a bull market
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Why our emerging markets team believes the asset class could be entering a bull market
Why our emerging markets team remains ‘zero-weighted’ on the Philippines
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Why our emerging markets team remains ‘zero-weighted’ on the Philippines
Samir Mehta: A stealth bull market in China means it’s time to revisit Asian equities
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Samir Mehta: A stealth bull market in China means it’s time to revisit Asian equities
Samir Mehta: Trump tariffs are unlikely to impact China’s big online retailers
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Samir Mehta: Trump tariffs are unlikely to impact China’s big online retailers
Investors should be ready for any scenario as Donald Trump weaponises trade tariffs.
This week we await the outcome of a call between Trump and Chinese president Xi Jinping to find out if tit-for-tat US-China tariffs will be paused as they were for Mexico and Canada.
But either way it would take a lot to disrupt the momentum of China’s big online retailers, argues Pendal’s Samir Mehta.
Last year China’s four big online shopping platforms – Alibaba’s AliExpress, TikTok, Shein and Temu – shipped almost $US200 billion worth of goods internationally. Of that, some $45 billion went to the US.
In anticipation of tariffs, Temu and Shein had already modified bulk shipping, diversified logistics and expanded their US networks. Meanwhile as TikTok’s future hung in the balance, Americans flocked to another Chinese app: Xiaohongshu.
“When a product provides a value proposition far superior to alternatives, tariffs might temporarily alter – but not permanently change – human behaviour,” says Samir.
Samir Mehta: How luxury stock Prada is making a fashionable comeback
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Samir Mehta: How luxury stock Prada is making a fashionable comeback
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