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Why a depreciating dollar could be good for EMs

Why a depreciating dollar could be good for EMs

Emerging markets have become much more resilient to outside shocks, according to ETF Securities’ Morgane Delledonne.

Speaking to Citywire Selector, Delledonne who is a fixed income specialist at the company, said despite the gradual tightening of monetary policy, EMs are stronger than they have been in the past.

‘EMs should be resilient to other countries raising rates. When investing in EMs, investor behaviour has evolved from what it was, say 10 or 20 years ago and we are set to see more flows into the sector despite what’s going on elsewhere.

‘It makes a lot of sense to have an allocation to emerging markets. In 2015 we started to see a depreciation of emerging market currencies versus the dollar. Regions like LatAm depreciated more than 60% while emerging Europe and Asia only depreciated by 6%.’

Delledonne said most large-cap countries are more prevalent to shocks as they are easier to take short positions in, especially in times of market stress.

‘In this environment of volatility, even if it’s currently at a very low level, investors need to be wary that it could change at any moment.

'If there is a change in monetary policy in the US and Europe, this could cause a shock. It’s time for investors to be very careful and very picky in the emerging markets they want to be invested in.

‘However, the performance of emerging market currencies year-to-date is pretty impressive, they have been growing a lot on the back of macro drivers such as investor caution on central banks.'

Positive for EMs

With global growth and global trade both on the up, Delledonne said the slight appreciation of the dollar could be a positive for the asset class.

‘The depreciating dollar is not necessarily bad for emerging markets, of course in the past this has been a challenge for EM assets. We see the outlook for the dollar as improving towards the end of the year, but nothing massive.

‘The fact is, it's improving off the back of better fundamentals, which should be supportive for emerging market assets.’

That being said, Delledonne said there are still some discrepancies regarding EMs which can occur in events such as a taper tantrum or elections.

‘What we saw over events such as Trump’s election, was that countries with better fundamentals and a stronger economic balance saw lower asset depreciation than their peers. 

'This is really a time for investors to position in emerging markets based on individual fundamentals rather than emerging markets as a whole.’

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