Emerging Markets: Why Now Is The Time To Send Your Dollars On Holiday
By Jeff Opdyke, Contributor
Dec. 9, 2020
Congress looks set to spend another $900 billion in pandemic relief. There's an investment play in that now and over the next year, at least.
Though certainly a ton of money, $900 bil is not nearly enough, given the gravity of American families going into Christmas was little spare cash and deeply behind in their rental and mortgage payments. House Speaker Nancy Pelosi calls it a down payment on a much larger, multi-trillion-dollar spending package in the new year. Remember that phrase – it's important later in the story.
Whether one agrees or disagrees with the necessity of the spending, this much is much is true: The US dollar is the sacrificial lamb. And in that is the next big investment opportunity – emerging market stocks.
In the see-saw world of global currency markets, a declining dollar will give strength to a welter of foreign currencies. The biggies are certain to benefit – the euro, the franc, the yen (the pound has to deal with Brexit, so who knows). But so too will a number of smaller currencies strengthen – from the Thai baht to the Czech crown. As such, markets priced in these smaller currencies could be the real winners of a weaker-dollar world.
Already, emerging markets are showing a bit of life. South Korea's KOSPI has picked up more than 24% on the year. China's Shanghai Shenzhen CSI 300 Index is up nearly 30% this year. Nigeria is up more than 30%. And Argentina has gained more than 33%.
But that's likely just the warmup phase. And, more important, the bulk of emerging market stock indices are flat to underwater, a reality that could very well change as the money flows out of the dollar and begins seeking a return elsewhere in the world.
Right now, US stock markets are trading at extreme prices, and because of the out-performance of a very narrow band of tech superstars US markets are near the very top of global asset valuations. Certainly, extreme valuations can persist. But at some point, the game ends. One could argue that the gains accruing already in certain, obvious emerging markets is simply the result of the smart-money investors getting ahead of the crowd and reallocating away from the greenback.
As the dollar sinks in coming months – and assuming the US economy doesn't crack and bring down the global economy – increasing amounts of money will likely begin pouring into emerging markets. There are simply too many to name that represent good value today – a list that includes Russia, the Czech Republic, Poland, Hungary, Mexico, Thailand, Indonesia, and several others.
Given the breadth of the emerging markets, it's a lot easier playing them through mutual funds, exchange-traded funds, or, better yet, a closed-end fund.
But if the dollar begins to weaken as expected, and if the glow illuminating key emerging markets today begins to shine on secondary and tertiary emerging markets, then closed funds could be primed for a strong 2021.
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