forbes-Here’s the rule: strong dollar means weak commodities (like oil) and weak commodities tends to be bad for emerging markets. If the market is to believe that the Trump Trade is one of America First, then that means more money for U.S. equities, more demand for the dollar, higher inflation, higher interest rates, and — perhaps — more U.S. corporate money in offshore tax havens coming home if the Republicans can pass a tax law making that attractive for the likes of Apple, et. al., currently headquartered in Dublin.
A strong dollar is particular troublesome for Latin America.
Investors in all Latin American securities looking to protect their gains should either put in stop-losses, or sell. This could get bumpy.
“I would extend the uncertainty until early February,” says Ricardo Adrogue, head of emerging markets debt at Barings in Boston. “Emerging market investors believe that the new administration will be great for the U.S., but bad for the rest of the world. Treasuries are going up, the dollar is strengthening and U.S. equities are going up while most foreign asset classes are selling-off. I don’t know why the market has come to this conclusion so quickly. I think there’s a bit of an overshoot.”
Specialist emerging market funds that have no choice but to be in emerging markets will seize on the volatility and buy in on the lows. These are long-term players with at least three to five year time lines. But individual investors that buy into those funds in the first place may want to consider what a strong dollar and a Trump presidency means for investment flow. Since his election, the U.S., U.K. and Australia have all seen security prices rise. Within the emerging markets, only Egypt (scraping along the bottom) and Russia (Trump is seen as more friendly to sanction removal) have done well. Russia turned negative today.
This is going to begin a difficult phase for emerging market investors due to expectations of a reflationary trade in the US exposing spread product to higher US treasury risk with the benchmark investment grade credits underperforming. Although commodities remain resilient with a recovery in external risk appetite, the anti-globalization sentiment has been weighing on EM with fears of trade protectionism and restricted access to capital.