“After rallying 10% from the February low to the August high, the rally has started to stall. While the Dollar Index (DXY) did make a nominal high in mid-November, more recently the index has been stuck around 96-97. This is important. In the post crisis-world a rising dollar has been associated with weaker EM returns. Since 2010, monthly changes in the dollar have explained roughly 30% of the variation in emerging market equity returns. A flat dollar removes a key headwind,” according to BlackRock.

Emerging markets stocks slumped this year well before their U.S. counterparts and that could be a good thing for the former.

“In this light, EM’s biggest advantage may simply be the fact that it got the bear market out of the way early,” notes BlackRock. “With the asset class now trading at its lowest valuation since the 2015 bottom and some of the key headwinds abating, any shift in sentiment is likely to be accompanied by a big EM bounce.”

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