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Emerging Market Stocks Underperform When the US Dollar Strengthens…Here’s Why

By Advisor Perspectives
Financial Services

The relationship between the performance of emerging market stocks and the US dollar is one of the tightest macro relationships that exists in investing. As we can see in the first chart, the relative performance of EM stocks vs the S&P 500 is highly negatively correlated with the level of the dollar. That is, when the dollar goes up, EMs underperform US large caps and when the dollar goes down they outperform. It’s like clockwork really. But that observation is nothing new. Indeed, given the recent strength of the dollar we’ve written about it twice in the last two weeks here and here. But it’s also a good time to not just remind readers of the relationship, but also to describe the mechanics of it. That’s what I’ll do here, using the Philippines as our case study. I have no particular bias one way or the other with the Philippines, it’s just one example of many in the EM world for which dollar strength equals trouble, and vice versa.

Read more at Advisor Perspectives.

Photo: Ervins Strauhmanis

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