Gavekal Capital: Which Countries are Likely to Outperform and Underperform in a Rising USD Environment?

Friday, September 12, 2014

Which Countries are Likely to Outperform and Underperform in a Rising USD Environment?

As we noted two days ago, a rising USD has some negative implications for commodity prices as well as emerging market stocks. Since commodities are priced in USD, a rising dollar will have a dampening effect on commodity prices generally. It also turns out that many of the big commodity producing countries happen to be emerging markets, many of whom carry a large amount of USD dominated debt. For these companies and countries, a rising dollar and falling commodity prices can have serious implications for both the income statement and the balance sheet, with the usual result of underperforming stock prices in USD terms.

Alternatively, a rising USD has some very positive implications for those countries like the US (whose consumers benefit from lower commodity prices) and Japan (which gains a trade advantage from a lower currency).

With this in mind we show below countries whose stock markets are likely to outperform in a rising dollar environment (admittedly a small list) and then countries whose stock markets are likely to underperform in a  rising dollar environment (a much larger list comprised mainly of commodity producing countries and EMs). The first set of charts shows the USD real trade-weighted exchange rate index (blue line, right axis) plotted alongside the performance of the country index relative to the MSCI World Index in USD terms (red line, left axis). The second set of charts shows the inverse of the USD real trade-weighted exchange rate index (blue line, right axis) plotted alongside the performance of the country index relative to the MSCI World Index in USD terms (red line, left axis).

Stock Markets with Positive Correlation to USD:
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Stock Markets with Nevative Correlation to USD:
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