Strengthening developing economy currencies along with a growing economy may continue to support the outlook for ETFs that track emerging market stocks and bonds.
“A more stable dollar, coupled with a slowing but still growing global economy, underpins our positive view on EM assets,” BlackRock strategists, led by Richard Turnill, said in a research note.
The strategists argued that the weakening U.S. dollar or strengthening emerging currencies helps remove a key risk for emerging market economies with large external debt burdens. Since many emerging debtors borrow in U.S. dollar-denominated debt, a stronger greenback would raise borrowing costs or tighten a developing economy’s financial conditions.
A stabilizing dollar outlook also diminishes the danger of taking on emerging currency exposure, which has historically acted as a large source of volatility for investors investing in local-currency-denominated emerging market debt.
“This underlies our recent call for a balanced approach to EMD, taking risk in both local- and hard-currency debt,” the strategists said.