How are emerging markets holding up in this new world of potential increased tariffs? How is this going to affect your portfolio?
Hello. My name's Paul Carroll, the CEO and founder of Efficient Wealth Management.
In the past 45 days, we have seen a modest sell-off in emerging markets. Is this the beginning of something worse, or is it just a blip?
In some emerging markets such as Vietnam and Malaysia, exports make up the bulk of their gross domestic product. These countries are in the early life cycle of a developing economy, one where they're using exports to create a domestic economy and a domestic middle class that can sustain itself in the future and, even better, import from other nations in the coming decades. This is a story we've seen in the past — even in the United States 150 years ago, when we were an emerging economy operating in the shadow of rich nations and exporting a great deal to those nations.
Today's interest rate and dollar valuation fluctuations are rather unpredictable. Therefore, it's very difficult to predict the impact of these changes on emerging markets going forward. Policymakers in emerging markets have a lot more rope to work with than Western domestic policymakers do, and that's because the interest rates are higher in their countries. They have tools to deal with this environment. Of much greater danger is that the United States tips into a recession and suffers a fully blown bear market, triggered in no small part by the forecast of a 15 percent drop in domestic earnings if the next round of punitive tariffs kicks in.
Now, in this scenario, should it happen, the Fed would be forced to drop interest rates. That would hurt the value of the dollar, and it would actually have the effect of boosting the value of foreign securities, be they developed or emerging. Given this uncertainty and the fact that there is a diversification value and a potential for gain in emerging markets, the best practice always is to maintain an appropriate exposure within your asset allocation, maybe even buy on the dips from time to time, and ride this out.
We wish you the best of investing success. Thank you.
Franck, Thomas. “Goldman Says an All-out Trade War Would Lower Earnings for US Companies by 15%.” CNBC, CNBC, 23 July 2018, www.cnbc.com/2018/07/23/goldman-tariffs-hitting-company-earnings-but-has-strategies-to-win.html.
“The Great Slowdown.” The Economist, The Economist Newspaper, 21 July 2012, www.economist.com/leaders/2012/07/21/the-great-slowdown.