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.

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