A strong dollar combined with overly sensitive institutional investors, emerging markets weakened in 2018, down 16% year-to-date (YTD). If you are properly diversified, your portfolio will own likely a small, yet very noticeable holding in emerging market stocks. You may be the first to notice a lag in total portfolio performance as a result, while being witness to the continued growth-run of the S&P 500, up 8.79% YTD.
Fear not, markets are victims of their own making. You will see a recovery in emerging markets. As long as you don’t need the money today, your time horizon should be long enough for you to hold out for a recovery. It does help, however, to understand the rationale of emerging market volatility and that’s what I’ll attempt to do today.
A strong dollar hammers opposing currencies. Emerging market stocks, for no fault of their own, experience comparative weakness for U.S. investors, only because of the currency move. This is good news for investors who believe in corporate fundamentals and the philosophy that EM countries will continue its growth and dramatic push into the global consumer market.
Traders and overly sensitive, large investors can move markets, especially illiquid, thinly traded emerging market stocks, as they take advantage of short-term opportunities. When Argentina’s President, Mauricio Macri, announced an interest in an IMF debt round, market traders jumped on the news, helping to plunge the currency more than 20% since August^1. Turkey’s President, Recep Erdoğan, installed his son-in-law as finance minister, the Turkish Lira continued its drop, -40% YTD.
Argentina announced additional austerity and other measures to prove its worth. Turkey, with all else being equal, is still a major EU partner in trade and banks have ample liquidity to measure a crisis^2. It might take a while, however, emerging markets more or less show themselves to be a buying opportunity rather than a loser.
At Eureka Wealth Management, I help reduce the noise of short-run market volatility and work with my clients to create a clear path forward for investing that meets their goals. I also help review tax & estate strategies, insurance, and retirement. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.
^1: Financial Times, 9/17/18, “Argentina aims to reassure IMF with austerity budget”