2018 has been a challenging year for emerging market equities, coming on the back of 2017, which was quite strong. Some observations on the current environment:
Year-to-date, emerging market equities are down 8.8% in U.S.-dollar terms. Nearly 5% of this cumulative decline came from the U.S. dollar strengthening against emerging market currencies.
As of this writing, the U.S. 10-Year Treasury yield has eclipsed 3.2%. While a lot of the U.S. Federal Reserve’s (Fed) rate hike policy was priced into the dollar’s level, we’ve seen it respond much more strongly to rising interest rates further out on the yield curve. In short, a sharp upward move in the 10-Year Treasury, in the current environment, seems to have more weight than what the Fed is doing, giving us a further catalyst for dollar strength.
It has been an interesting year to watch the price of a barrel of Brent Crude oil, more than $86 as of this writing. Certain emerging markets are closely geared to the price of Brent Crude, so amid a challenging year, you can see total returns for Qatar (+20.74%), Colombia (+9.47%) and Russia (+9.41%) on the one hand, and South Africa (-24.31%), Greece (-29.41%) and Turkey (-45.82%) on the other.1
Despite the Rhetoric, Global Trade Continues to Exist
Even with what is sometimes termed a “global trade war” going on, it is important to remember that today’s world is extremely globalized. Yes, there has been tension, but the goal of that tension is to make deals, like the recent United States-Mexico-Canada Agreement (USMCA). Change is difficult to digest at times, but global trade won’t be going away.
If one thinks of the S&P 500 Index, which is made up of companies that derive less than two-thirds of their weighted-average revenues from inside the U.S., it evidently has massive global exposure. Some might even argue that these firms are so globally exposed that international investments aren’t needed.
