Multiple asset classes have been affected by Donald Trump’s surprising victory in the U.S. presidential election last month with two of the more obvious choices including the U.S. dollar and emerging markets equities.
While the PowerShares DB U.S. Dollar Index Bullish Fund (NYSEArca: UUP) has been soaring against the backdrop of Trump’s victory and the Federal Reserve’s first interest rate hike of 2016, emerging markets equity ETFs like the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) are struggling.
UUP tracks the price movement of the U.S. dollar against a basket of currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. VWO, a favorite among frugal investors and advisors alike due to its paltry annual fee, has the potential to deliver again in 2017.
A soaring greenback “spurred hefty outflows from emerging markets as a stronger dollar and higher U.S. rates have dimmed the allure of riskier assets in developing countries. In addition, emerging-market companies’ ability to service dollar-denominated debt will be dented,” reports CNBC.
Good news: Some market observers and professional investors think emerging markets equities will be able to again firm up even amid dollar strength.
“As that momentum slows in the dollar and U.S. bond market, I think what you’re going to see is some rotation back into emerging markets,” HSBC’s Herald Van Der Linde told CNBC in an interview.
Investors can stay involved with emerging markets equities even as the dollar soars with ETFs such as the Deutsche X-trackers MSCI Emerging Markets Hedged Equity ETF (DBEM). If the U.S. dollar continues to strengthen against foreign currencies, investors can consider DBEM to access the emerging markets and limit currency risks.
Bolstering the case for DBEM is that emerging markets central banks are not shying away from cutting interest rates to support exporters. For example, Brazil has lowered borrowing costs twice in recent months.
Van Der Linde “pointed to plays on themes that weren’t sensitive to global and macro developments, such as financial inclusion, automation, changes in retail formats and the Asian defense industry,” reports CNBC.