A weaker US dollar could boost emerging markets equity returns

A weaker US dollar could boost emerging markets equity returns

Emerging markets (EM) equity returns – as measured by the MSCI Emerging Markets Index – are inversely correlated with the US dollar. In the chart, as one line zigs, the other tends to zag. As such, a declining dollar historically has led to positive returns for EM equities over time. Many market pundits believe a US economic slowdown and the eventual end of the US Federal Reserve’s tightening cycle could continue to weigh on the currently strong US dollar.

Emerging markets equities are inversely correlated with US dollar

MSCI Emerging Markets Index compared to Trade Weighted US Dollar Index (12/31/2006 – 1/31/2023)
Emerging markets equities are inversely correlated with US dollar

Source: YCharts. As of 1/31/23

What this means for investors

A weakening US dollar could provide a tailwind for EM investors. Additionally, EM equities have historically been less efficient than developed markets equities, making EM an attractive asset class for active management.


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