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A simple thread to understand relationship between US Dollar and Emerging Markets.
The relationship between the performance of Emerging Market stocks and the US Dollar is one of the tightest macro relationships that exists in investing.
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When US Dollar weakens, EM index outperform World Index and when US Dollar strengthens EM index underperform World index.
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Then from 2001 to 2010, the U.S. dollar depreciated over 18% while the MSCI EM Index outperformed the MSCI World Index by 14% annualised.
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Overall, from 1995 to 2020, this relationship has a correlation of -0.35.
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A weaker dollar allows Emerging Market countries more freedom to provide fiscal stimulus without fearing negative implications for their own economies.
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As case with India, government will be more comfortable to push fiscal stimulus now when INR is stable.
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Emerging markets are a natural choice as they tend to benefit from weakening dollar and grow faster than DMs.
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Easy monetary policy weakens the dollar and leads to its depreciation. Since U.S. dollar is a fiat currency, meaning that it is not backed by gold, it can be created anytime easily.
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Since US Fed has expanded its Balance Sheet at record speed, US Dollar may go through a weak patch.
Taking cue from multiple cycles in the past, if US Dollar continues to weaken, Emerging Market stocks may outperform.
Watch this trend closely!
15/15 End
Edelweiss Emerging Market Opportunities Equity Offshore Fund
https://t.co/ea0nbUxAmF
Edelweiss Greater China Equity Offshore Fund
https://t.co/AXEWzfKdhY
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