Nice piece on Bloomberg the other day countering my argument for investing in emerging markets (“EM”) right now. Some very well known and successful EM investors believe now is the time to invest in EM given their underperformance relative to developed markets including the U.S. unless a recession is around the corner. These investors are basing their argument on mean reversion which I appreciate. Furthermore, they’re anticipating the rally in the U.S. dollar (“USD”) to not last much longer given the duration of recent USD rallies. I can appreciate that argument as well.
My only concern is the Fed’s tightening posture which I discussed in my last two posts. Rising rates and a shrinking balance sheet are reducing the global supply of USD, which could continue to negatively impact EM and keep USD strong. I guess we’ll see at this point. However, I remain cautious on increasing EM exposure here without something along the lines of an all clear signal.