Investors should regard the recent selloff in emerging markets as an excellent entry point. Despite concerns about slowing growth in China, the global economy should expand at a respectable rate in 2014 and 2015, providing support to export-focused emerging markets.
But many market commentators don’t expect the US economy’s continuing strength to lend support to Asia for two reasons:
However, the West’s concerns about China’s economic challenges remain overblown. And a strong US dollar doesn’t necessarily translate into weakness in Asia.
For one the region’s largest corporations generate more and more of their revenue in international markets. And Asian currencies are no longer pegged entirely to the US dollar; the greenback’s movements don’t necessarily have the same effect as in the past.
Moreover, much of Uncle Buck’s recent upside stems from the US economy’s strong performance relative to the world’s other major economies—and solid growth in America’s gross domestic product (GDP) has usually been a positive for Asia’s emerging markets.
Historically, the markets that tend to outperform six to 12 months after the US dollar rises exhibit two characteristics: They’re inexpensive relative to their longer-term averages and located in countries that enjoy a current account surplus.
But for now, the assumption that a strong dollar will result in weakness in Asia has slowed inflows into the region’s equity markets. Profit-taking has also contributed to the pullback.
The conventional wisdom calls for a bull market for the US dollar relative to international currencies. Investors shouldn’t necessarily rule out this outcome, but it’s still too early to view this prospect as a sure thing.