Emerging Market Weakness to Infect US Markets? — Part II
Emerging Market Correction Blog Series
Rising Rates and Currency Weakness
As we explored in our last post – stock market investors have been roiled in 2015 by increased volatility. We at Ideal Asset Management see this as a result of a slowdown in emerging markets which was exacerbated by China’s decision to devalue its currency in August. Emerging market weakness can be seen in many EM countries, such as: Brazil, Russia, China, Singapore, Indonesia and Africa. Our post today will review the impacts of potential for rising rates and currency weakness.
The Potential For Rising Rates
Economic weakness in emerging markets along with expectation of rising rates in the United States have contributed to a sharp rise in the dollar vs. emerging market currencies. For example, the Brazilian Real is down over 30% vs the US dollar in 2015. Currency weakness in 2015 has been widespread throughout emerging markets, with declines against the US dollar ranging from 10-50%.
The effects of currency weakness will be a headwind for US multinationals for the remainder of 2015 and into 2016. US multinationals already suffered in 2015 as a result of the sharp appreciation of the US dollar vs the Euro. Many investors are looking forward to increased earnings growth in 2016 as a result of the recent stability of the US dollar vs. the Euro. However, the sharp rise in the US dollar vs. emerging market currencies so far in 2015 is already leading to earning estimate reductions for 2016.
Ideal Asset Management’s Take:
If a bear market should arrive in the future, it will likely offer an abundance of stocks trading at bargain prices. For this reason, Ideal Asset Management believes it makes sense to increase cash holdings to reinvest at lower prices.
All of the ideas expressed in this article are the opinion of Ideal Asset Management LLC
Before trading on any of the information in this article, consider consulting your financial advisor to make sure it suits your financial goals
All investments carry the risk of loss