Page 29 - Kiplinger's Personal Finance - November 2018

GLOBAL INVESTING
How to Navigate

Emerging Markets

Currency woes and runaway inflation in some countries

mask long-term opportunities. BY NELLIE S. HUANG

IF YOU’VE BEEN INVESTING IN EMERGING-
markets stocks, you probably have a
bad case of whiplash. After a rip-roar-
ing run in 2017, the MSCI Emerging
Markets index fell 17.7% from its peak A stronger dollar
in late January 2018 through mid Sep- is a natural outcome of the
tember. “There’s certainly a lot of vola- rise in interest rates. The greenback the most vulnerable emerging econo-
tility out there,” says Arjun Jayaraman, has gained 7.2% against a basket of for- mies, including Turkey and Argentina,
a manager of Causeway Emerging Mar- eign currencies since early February. teetered. Turkey has foreign-currency-
kets fund. “And yes, there will be more.” That spells trouble for the many denominated debt worth 82% of its
That’s no reason to run from emerg- emerging-markets countries that have gross domestic product; Argentina,
ing-markets stocks, though. In fact, significant chunks of debt denomi- 54%. Since the start of the year, Turk-
it may be a good time to dip in, espe- nated in U.S. dollars. A stronger dollar ish stocks have lost 50.4% and Argen-
cially if your portfolio is out of line means they must fork over more of tine shares have plunged 54.3%.
with your long-term investment plan. their home currency to buy dollars to But not all emerging-markets
Even a moderately risk-tolerant U.S. pay their debts . Countries that seek countries fell into the same debt trap.
investor with a 10-year time horizon new loans face heftier borrowing costs, “Some countries learned their lesson
should have 30% of his or her stock too. Dollar-denominated debt owed by in the Asian currency crisis in the late
portfolio in foreign shares, and of that, emerging-markets countries has more 1990s,” says Lawlor. China, India, Tai-
6% should be devoted to emerging- than doubled since 2009 and is at a re- wan, Thailand, Indonesia and Korea
markets stocks, says Joe Martel, a cord high. owe foreign-currency-denominated
portfolio specialist at T. Rowe Price. debt that amounts to roughly 30% or
But you need to understand the Tough choices. Emerging nations are less of their GDP, according to Black-
dynamics at play in these far-flung, in a pickle these days, with a stronger Rock Investment Institute. The stock
volatile and, yes, risky markets. dollar not only pushing emerging- markets in those countries are down,
Rising interest rates and a stronger markets currencies lower but also too, but not as much; only China and
dollar are a drag on emerging-markets nudging inflation higher. Many coun- Indonesia are in bear-market territory.
stocks. The Federal Reserve has hiked tries haven’t implemented the tradi- To further muddy the waters, an
rates three times since late 2017, with tional fix—a hike in interest rates to escalating row over tariffs threatens
more to come. That makes U.S. assets defend their currency—because to markets and economies all over the
more attractive, pulling investments do so could crimp economic growth world. The U.S. has had trade disputes
away from emerging markets—money at home. Turkey finally did so in mid with six of its top seven export mar-
that those countries need to fuel eco- September, after the lira had lost kets. The U.S. has imposed duties on
nomic growth. “The U.S. threw a nearly half of its value since the start $250 billion of Chinese goods—nearly
stone in the water,” says Philip Lawlor, of 2018. The move boosted the cur- half the value of all goods that China
managing director of global markets rency from its August low, but it is still exported to the U.S. last year. That
research at FTSE Russell. “And the down 38.6% for the year. could be another drag on China’s
ripples are in emerging markets.” It was just a matter of time before already slowing economy. Continued

ILLUSTRATION BY OLI WINWARD 11/2018 KIPLINGER’S PERSONAL FINANCE 59

K11I-EMERGING MARKETS.1.indd 59 9/21/18 3:11 PM