Emerging Markets stocks have performed very badly in recent months, even as US stocks have climbed back close to their record highs from earlier this year. This is a big change from the pattern that held during the bull market in emerging assets of the last decade, when strength in the developed world was matched by even greater strength in the emerging world. John Authers suggests that the greatest problem for emerging markets now is the strong US dollar.
Are the emerging markets that’s the big economies that are not yet in the developed club such as brazil russia india and china are they decoupling if so are they doing so in the right way now in this chart we see in the red line here on this scale the msci emerging markets index divided by its world index for the main developed economies of north america europe
And japan what that means is that whenever this line is going up it means the emerging markets are doing better their stock market is doing better than the developed world whenever it goes down they’re doing worse meanwhile the green line on this scale is just the msci world itself the measure of those big developed world stock markets when it’s going up things
Are going well for them when it goes down such as during the crisis things are going badly now the theory back about 15 years ago was that emerging markets were ready to decouple that meant that they could start selling stuff to their own people to their growing middle classes rather than to the developed world and that meant that they could grow even if the
Developed world went into recession they could de couple but in effect what happened was almost the reverse if you take a look you can see right the way through this period this great bull market for emerging markets they outperform by more as the developed world does well in other words they functioned almost as a geared play on the developed world not as some
Kind of an alternative to it and similarly once you get the crisis so emerging markets which is not where the crisis started do even worse than the developed world for a while now there’s a period of turmoil obviously during the crisis but then in the last few years you’ve seen exactly the opposite phenomenon you’ve seen emerging markets steadily do worse than
The developed world even as the developed world has done well that is decoupling but exactly the wrong kind if you’re investing in the emerging oils now why is this obviously for the last few months since maybe around about here there has been the risk of a trade war which people think i think correctly will hurt the emerging world more than it hurts the developed
World but perhaps the most important relationship is with the dollar in broad terms the rest of the world’s currencies went like this against the dollar dollar had a pronounced period of weakness the rest of the world currencies gained then had a period of turmoil during the crisis and then you had a pronounced long period of dollar strength where other people’s
Currencies weakened against the dollar and emerging markets did poorly compared to the developed world in the last year or so you saw a brief period of dollar weakness for most of last year and you’ve seen the dollar strengthened a lot this year again directly in line with emerging market performance broadly speaking there is a strong perception that a strong
Dollar is bad news for emerging markets that in turn means that even though emerging markets now look very cheap this may not be the time to buy them because you need to rely on a weaker dollar which means you need to hope that the fed isn’t going to raise rates as expected or that we’re not also that we’re not going to get the tariffs that many people expect
From the us as it stands at the moment the emerging markets have not decoupled from the dollar and that is a problem you
Transcribed from video
De-coupling Emerging Markets | Charts that Count By Financial Times
