Overweight India, Underweight these countries
While Europe’s third largest fund house is overweight India, others are busy pulling out of emerging market (EEM) (VWO) economies. As the US shows signs of growth and inflation, we may soon see institutional investors going underweight on them. Of particular note will be those emerging markets that are vulnerable to the US dollar’s appreciation.
The markets broadly expect the dollar to appreciate amid the US Federal Reserve tightening monetary policy in the US combined with President Donald Trump’s protectionist policy changes. With the US dollar appreciating, countries with a whole lot of dollar-denominated debt on their balance sheets could land in thick soup.
3 economies that would be most affected
In this series, we look at three such economies that stand to be most affected if the US dollar (UUP) appreciates. All of these fall in the Latin American (ILF) region. According to our analysis of data composed by Macquarie Research, these three emerging market economies would get hit the hardest if the US dollar appreciates as we move ahead into 2017. These countries hold the highest US-dollar denominated debt as a percentage of their total external debt.
The top three economies with the highest amount of US-denominated debt as a percent of their total external debt are Venezuela, Chile (ECH), and Columbia (GXG).
As these countries stand first in line to fall under the brunt of a rising US dollar, let’s take a deeper look at what the economic scenario in each of these nations. For investors searching for higher yields accompanying these riskier countries or considering potential short positions, we would also look at certain investment products.