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The Weakening Dollar Gives New Life to Emerging Market Equities
Emerging Market Equities Set to Outperform Developed Markets
According to UBS, emerging market equities are expected to outperform their developed market counterparts. The recent slowdown of the U.S. dollar provides a tailwind for emerging markets and allows their central banks to begin easing rates. Additionally, a weaker dollar benefits emerging markets that have significant imports in commodities, such as India. These countries can enjoy lower input costs, especially in energy, as most commodities are denominated in dollars.
Weaker Dollar Improves Access to Capital
In a weaker dollar environment, the availability of capital for emerging markets improves. This reduces the risk of strain on nations and companies. Emerging markets often sell debt in dollars, and a depreciation of the dollar against their home currency makes it easier for them to make outstanding debt payments. Moreover, when the dollar weakens, the overall funding environment eases up, making lenders and suppliers of capital more willing to provide funds to emerging markets.
Environmental, Social, and Governance Factors Should Be Considered
Investors eyeing emerging markets should also consider environmental, social, and governance (ESG) factors. According to UBS, emerging market equities are currently trading at a significant valuation gap, with the MSCI Emerging Markets index trading at a 36% discount to the S & P 500. By incorporating ESG characteristics in company selection, investors can mitigate risks and support performance. The MSCI EM ESG Leaders index has underperformed the broader EM benchmark, making valuations attractive for investors.
ETFs Provide Simple Exposure to Emerging Markets
One of the simplest ways for investors to gain exposure to emerging markets is through ETFs. The three largest emerging market ETFs are Vanguard FTSE Emerging Markets ETF, iShares Core MSCI Emerging Markets ETF, and iShares MSCI Emerging Markets ETF. In 2023, these ETFs have shown positive performance, with Core MSCI up 9.6%, iShares MSCI Emerging Markets up 8.2%, and Vanguard FTSE Emerging Markets up 7.4%. By investing in these ETFs, investors can take advantage of the opportunities presented by the weakening dollar and the potential for outperformance in emerging market equities.
Conclusion: Seizing the Opportunity in Emerging Markets Amidst a Weakening Dollar
The current weakening of the U.S. dollar is breathing new life into emerging market equities, paving the way for lucrative opportunities for businesses venturing into these markets. According to UBS, emerging market equities are poised to outperform their developed market counterparts, bolstered by the tailwind provided by the sluggish dollar. This favorable environment allows central banks in emerging markets to ease rates, fostering a conducive climate for economic growth and investment.
The benefits of a weaker dollar extend beyond monetary policy. Emerging markets heavily reliant on commodity imports stand to gain from lower input costs, particularly in energy, as most commodities are denominated in dollars. This advantage, exemplified by countries like India, enables businesses operating in these markets to enjoy reduced expenses and enhanced competitiveness.
In addition to cost advantages, a weaker dollar improves access to capital for emerging markets. As the depreciation of the dollar against their home currency eases the burden of outstanding debt payments, the risk of strain on nations and companies is mitigated. This enhanced availability of funds further encourages lenders and capital suppliers to invest in emerging markets, fostering economic growth and business expansion.
It is important for new businesses eyeing emerging markets to also consider environmental, social, and governance (ESG) factors. By incorporating ESG characteristics in company selection, businesses can both mitigate risks and support performance in these markets. Moreover, the valuation gap present in emerging market equities, with the MSCI Emerging Markets index trading at a 36% discount to the S&P 500, offers attractive opportunities for business investments.
To capitalize on the potential presented by the weakening dollar and the outperformance expected in emerging market equities, businesses can also consider investing in Exchange-Traded Funds (ETFs). ETFs such as Vanguard FTSE Emerging Markets ETF, iShares Core MSCI Emerging Markets ETF, and iShares MSCI Emerging Markets ETF provide a simple and accessible avenue for businesses to gain exposure to and benefit from emerging market growth and potential returns.
In conclusion, the current weakening of the U.S. dollar presents a unique opportunity for new businesses to explore and expand into emerging markets. With expectations of outperformance, improved access to capital, and the consideration of ESG factors, businesses that strategically position themselves in these markets stand to reap the rewards of economic growth, reduced costs, and long-term sustainability. By embracing this "hot take" and venturing into emerging markets, new businesses can thrive in the evolving global economic landscape.
Article First Published at: https://www.cnbc.com/2023/07/21/dollar-is-showing-signs-of-weakening-how-investors-are-playing-trend-.html