While the prerequisites appear similar, there are many unknowns in the current pandemic environment. One is the ability of emerging market economies to recover quickly. Although Asia has recorded lower levels of illness and death from COVID-19, the region has been hit hard economically. With the exception of China, most other emerging countries have seen their GDPs contract in 2020. But as vaccines gain momentum in late 2021 and 2022, pent-up global demand and trade are expected to grow. straighten out. There is already evidence: Data from December 2020 showed China’s monthly trade surplus to hit a record $ 80 billion globally, nearly half that with America – even as the Trump’s trade tariffs for 2018 remain in place.
Another wild card may be US interest rates relative to other markets around the world. Although the Fed is expected to keep short-term rates close to zero until 2022, dozens of emerging market central banks have also cut rates to historically low levels. In recent weeks alone, bond hawks have demanded higher long-term US rates, further steepening the yield curve and making the greenback more attractive. A good sign of the dollar’s weak cycle would be to see emerging rate hikes with a stable US yield curve. These two factors will depend on how quickly the economies recover, which again is tied to the rollout of vaccines and the end of the pandemic.
In terms of the new resurgence of commodities, the influence of oil in this cycle may be different. For much of the past 50 years, persistent imports of US crude have caused US dollars to flood the world. But things have changed a lot since the global financial crisis. According to the Energy Information Agency, the United States increased national oil production to nearly 11 million barrels per day by the end of 2020, up from about 5 million per day in 2007. Additionally, there were peak months of over 13 million barrels produced when the United States was in fact a net exporter. US oil exports in a global recovery could actually reduce the US trade deficit.
Finally, geopolitics and unforeseen crises could trigger a flight to security. Outbreaks in Iran, North Korea, the Taiwan Strait or the South Seas could all create a race for the US dollar.
Fundamentals suggest that this multi-year US bear cycle may have started, ending the long bearish cycle in emerging markets. While investors haven’t caught last March’s COVID-19 lows, it may not be too late to step in if the multi-year cycle repeats itself.
Peter Marber, New York, is Portfolio Manager, CIO of the New World Opportunities Fund and Head of Emerging Markets at Aperture Investors LLC. This content represents the views of the author. It was submitted and edited in accordance with Pensions & Investments guidelines, but is not a product of the P&I editorial team.