Used in more than 70 percent of all international transactions and a denominator for many of the world’s most important assets, the US Dollar is by far the world’s most traded currency. That’s not likely to change any time soon.
What is likely to change is the strength of the greenback. While the dollar continues to show relative strength, especially against emerging market currencies, it’s only a matter of time before the Fed’s multi-trillion dollar printing spree starts to deflate the dollar’s value.
As we’ve mentioned ad nauseum in the past, real assets are the way to go when entering an inflationary environment. But it’s also important to think about diversification from a regional perspective. Given that inflation tends to hit emerging markets first, now is an excellent time to take advantage of the strength of the dollar and acquire real assets at a discount in emerging markets.
More Bang for Your Buck
There’s no denying that the US Dollar has had its ups and downs over the past few years. COVID-19 and the monetary actions taken by the Federal Reserve have undoubtedly had an effect. After gaining strength during the early days of the pandemic, the US Dollar lost ground and still hasn’t fully recovered to its pre-pandemic levels.
However, despite its current below-average standing, the US Dollar remains the strongest and best-performing of the dominant global currencies because of the successful vaccination campaign stateside and the massive stimulus packages that have managed to keep the US economy afloat.
What this means for investors with US Dollars is that they can get more bang for their buck in emerging markets by taking advantage of favorable exchange rates. For instance, the US Dollar conversion to Colombian Peso has been trading above its 2019 average since March 2020 – as can be seen below.
COP to USD, 1 YR
Now is the time for investors to take advantage of this favorable foreign exchange market, particularly while the trend is accentuated by low oil prices, which also exert downward pressure on the currencies of petroleum-based economies such as Colombia, Brazil, and Mexico.
A Boost to Emerging Market Exports
Of course, emerging market investment is a vast universe. Choosing a sector can be a long and arduous journey, even after you’ve made the decision to allocate to the EM space.
But consider this – developing economies benefit from the competitive advantage brought about by a weaker currency as exports become more attractive globally due to their lower price tag.
The expected uptake in trade due to pent-up demand and the accelerated reopening in countries like the United States will favor exports from emerging markets.
Select Commodity Price Indices
In fact, we’re already starting to see a significant increase in commodity prices, brought about by combination of rising demand and possible USD inflation. In emerging markets, where operational costs are significantly lower, businesses which export commodities to the developed world are facing a highly favorable environment.
Global trade dynamics are chaotic, to say the least. From the unprecedented blockage of the Suez Canal to rising shipping rates to a record surge in global trade, it’s challenging to make heads or tails of the current state of trade.
But it’s certainly worth trying. Because with unprecedented conditions come unprecedented opportunities. If by now you are somewhat convinced that your US Dollars would do well overseas, your strategic thinking shouldn’t stop there.
“Among EM countries, an environment of rising inflation and rates favors markets that are resilient against higher funding costs and in fact benefit from rising commodities,” said Bank of America EEMEA Cross Asset Strategist David Hauner in an interview with CNBC.
Historical data hints at another commodities super-cycle
In this regard, a particularly attractive asset class are export-oriented agriculture operations. Throughout Latin America, high-end products such as coffee and tropical fruits procure both premium prices and high volumes in developed economies like the United States and the European Union, particularly when currencies such as the US Dollar and the Euro are strong.
Given that the United States and the European Union are set to be the regions of the world to most quickly achieve herd immunity and fully re-open, it’s safe to assume that demand for foreign consumer goods will accelerate throughout the year. So, why not invest in an asset that is poised to benefit from these dynamics?
Moreover, momentum in emerging markets will continue to grow as the demand for commodities, both mineral and agricultural, increases due increased infrastructure and consumption spending by the high-dollar purchasers such as the United States and China.
The current environment requires decisiveness and creative thinking. With commodity prices likely to continue their upward trajectory (perhaps even entering supercycle conditions), and commodity-producing real asset merits serious consideration.
Farmland: inflation hedging, commodities exposure, and diversification all in one.
The so-called reopening plays that most investors are already cycling through fall short of the ROI that your portfolio deserves. Capitalizing from the global dynamics triggered by a strong US Dollar and end-of-COVID trade flows is a winning formula for those bold enough to add emerging market assets to their portfolios.
If you have capital to invest, the appetite to go for higher risk-adjusted returns, and the global vision to go beyond traditional assets, the attractiveness of investing in commodity-producing assets in stable emerging markets is undeniable.
Don’t Wait Too Long
The current macroeconomic scenario certainly seems to favor dollar-based investors. Developed market economies – particularly the United States – are already reopening and seeing accelerated economic activity. Other regions of the world are expected to take longer to achieve herd immunity, favoring the outlook of a strong US Dollar for at least the remainder of 2021.
Although, not all emerging markets are equal. It goes without saying that certain countries will fare better in their response to COVID-19 than others. But the point remains – a strong dollar makes assets in EM economies more attractive, especially in light of future US inflation.
As they say, get while the getting is good. And for those holding US dollars and looking for a place to park their capital in the face of anticipated US inflation (not to mention potential hikes in capital gains taxes), emerging markets are an interesting choice.
2021 has thus far been characterized by a progressive strengthening of the US dollar in spite of inflation fears. But those conditions won’t last forever. Now is the time to take advantage of the relative strength of the dollar by looking to emerging markets for attractive opportunities – especially in real assets.