I have heard a lot of commentary about the emerging markets being a mess. How suddenly China’s stock market as measured by the Shanghai composite is down by 20 percent. Did investors just wake up to this? Hello? I am rather sure that China’s stock market has been down about 20% for some time now, and from a technical analysis standpoint, it appears to be in the process of forming a bottom. It started diverging from the S&P 500 sometime around April.
Strong Dollar = Not Good
Besides, should any of this be a surprise? A stronger dollar is not good for emerging markets or their stocks. It devalues local currencies making imports more expensive sparking inflation. It reduces the value of their exports, reducing revenue and profits. It hurts commodity prices, and it makes it more challenging for a local government to repay foreign debt denominated in dollars. Not exactly a great formula for economic prosperity. So as long as the dollar continues to strengthen, emerging market will continue to struggle in general. Throw in a trade war between the US, China, Canada, and Europe, why would emerging markets be doing anything but go down? It seems obvious. Duh!
China’s stock market is a perfect example. The Chinese yuan has weakened sharply versus the dollar, from 6.30 in April to 6.9 today. That was precisely when the significant divergence between China and US equity markets started.
Oh and just about the entire complex.
What About Rate Hikes
Factor in a US Federal Reserve that is raising rates, making our US yields more attractive to investors, is undoubtedly not going to help the scenario either. Why would emerging markets be doing well? It seems fairly obvious they should be struggling. Should the Fed continue to raise rates, and the dollar strengthens further, the situation will continue to get worse, not better for emerging market.
China needs the trade tensions to ease, but that's a conversation for another day.
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