How To Think About Emerging Market Stocks In 2024

How To Think About Emerging Market Stocks In 2024
Theodora Lee Joseph, CFA

3 months ago2 mins

So 2023 hasn’t been the greatest for emerging market (EM) stocks. If you jumped on the MSCI EM index bandwagon this year, you’re probably lagging quite a bit behind the S&P 500. Even if you took China out of the mix, it wouldn’t have saved you. And that’s partly because China is a behemoth and when it sneezes, the whole region catches a cold. But it’s also because of something else: the almighty dollar.

See, EM stocks like to play a game of opposites with the US dollar. When the greenback flexes its muscles, emerging market economies tend to wither.

A robust dollar beefs up commodity prices for most of the world (because they’re usually priced in USD), hitting demand and thereby, the economies that rely heavily on selling them. It also makes debt repayments pricier, since lots of EM countries and their companies borrow in dollars. Research from the International Monetary Fund shows that a 10% boost in the US dollar knocks down economic output in emerging economies (red line) by a hefty 1.9% within a year. And that drag sticks around for a solid two and a half years. It doesn’t have nearly the same impact on advanced economies (blue line) – they tend to take a 0.6% hit, which fades away in a year.

Unfortunately, it looks like the strong dollar will be with us for a while. Here’s the deal: the dollar’s strength is being fueled by the country’s high interest rates. When rates are lofty, international savers and investors want more of that currency, making it stronger. And those rates aren’t likely to drop in short order: the Federal Reserve, which has been hiking interest rates in a battle against inflation, doesn’t look to be in a hurry to change course. After all, inflation is still on the hot side, and the economy and job market are generally holding up pretty well.

But, on the bright side for EMs, some other, lasting factors could give their economies a boost: fragmentation into smaller global trading blocs, near-shoring and friend-shoring, supply chain de-risking, and heightened demand for materials in the push toward the net-zero transition.

So if you’re thinking about investing in EM assets, it’s worth remembering that compared to developed markets, the EM world is still highly splintered, meaning not all countries will be impacted to the same degree by big-picture changes. Because of that, you have to be picky to rake in gains.

For example, you could choose individual EM country ETFs to invest in, like the Franklin FTSE Mexico ETF (ticker: FLMX; expense ratio: 0.19%) if you believe Mexico could benefit from near-shoring trends, or the iShares MSCI India ETF (INDA; 0.64%) if you believe India could become the new China, or the iShares MSCI Emerging Markets ex China ETF (EMXC; 0.25%) if you simply want to exclude a certain country from the benchmark.



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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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