Why BlackRock prefers ‘pick’ stocks in emerging markets as the US dollar weakens

The backdrop for emerging market stocks has become more positive as the US dollar weakens and China reopens its economy after severe COVID-19 restrictions, according to BlackRock, the world’s largest asset manager.

Equities in emerging markets have soared recently, after a significant slowdown in developed equity markets, and have fallen nearly 20% since mid-2021 when many emerging market central banks began tightening, the BlackRock Institute for Investment said Tuesday in a note led by its chief global investment strategist. Monetary policy. Wei Lee.

“We think the prolonged slide in emerging market equities and the recent rally show a lot of economic damage in price now,” Lee and other investment strategists at BlackRock said in the note. Emerging market prices are peaking, they wrote, while a weaker US dollar and China’s reopening have also helped emerging market assets in recent months.

BlackRock Investment Institute note dated January. 17, 2023

Meanwhile, the ICE DXY US Dollar Index,
A measure of the dollar’s strength against a basket of major currencies is down about 1.1% this year, according to FactSet data, at last examination.

The dollar rose in 2022 as the Federal Reserve aggressively tightened monetary policy in an attempt to tame high inflation in the United States. However, the pace of inflation was showing signs of slowing, giving investors hope that the Fed may pause interest rate hikes. in 2023.

According to BlackRock’s note, “a pause in rate hikes by the Fed is likely to help spur further declines in the US dollar.”

“Emerging market economies have proven resilient to what should have been a significant tightening of global financial conditions as the Fed embarked on its fastest hiking cycle since the 1980s,” the strategists said.

This is partly because emerging market central banks were ahead of policy tightening in developed markets, while “higher commodity prices limited the fallout,” according to their note.

Meanwhile, analysts said that “the damage from rising interest rates has not yet been fully realized” in developed markets (DM). “We prefer select emerging market stocks and bonds to our DM peers.”

iShares MSCI Emerging Markets ETF EEM,
It has jumped 8.4% this year through Tuesday, outpacing the S&P 500’s gain by nearly 4%, according to FactSet data. iShares MSCI EAFE ETF EFA shares,
which tracks stocks in developed markets in Europe, Australia and the Far East, rose 7.8% over the same period.

Overall, emerging markets enjoy “higher levels of currency reserves, smaller current account deficits, improved external balances, and a better mix of debt maturity than in previous DM tightening cycles that raised volatility,” BlackRock strategists said.

Read: Why the US Dollar’s Epic Rise Could Be a “Wrecking Ball” for Financial Markets

“At its peak, the US dollar rose more than 19 percent in 2022 before falling in the fourth quarter,” Wade Pallett, chief investment advisor for West Wealth Management Group’s BNP Paribas, said in a January 11 note.

Paliet said that many emerging markets rely on borrowing denominated in US dollars to “build” their economies. “When the Fed raises interest rates, which strengthens the dollar, that makes it more and more expensive to pay off those loans.”

Over the past few months, he wrote, “while US stocks have stabilized, emerging markets have risen more than 20 percent and entered a bull market.”

US stocks It mostly closed lower on Tuesday As investors weigh Goldman Sachs Group GS’ fourth-quarter earnings results,
and Morgan Stanley MS,
S&P 500 SPX Index,
It ended down 0.2%, while the Dow Jones Industrial Average ended,
down 1.1% and the technology-laden Nasdaq Composite,
It rose 0.1%.

Read: Why US investors can’t ignore the Bank of Japan meeting on Wednesday

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