Are emerging market indexes affected by currency risk? (It sounds like it from the article, currency risk was something I wanted to study thoroughly before I invest international markets)
I would think they would be a really great buying oppurtunity sometime in the near future when they are have below average overall returns AND foreign currency is weaker than average.
Every time you invest abroad, there is a currency risk. Until recently the exchange rate trend of many emerging markets currencies worked in our favor, i.e. they were steadily strengthening against the dollar (Brazil, South Africa, Chile, Mexico, Russia, etc...) hence giving us that extra bit of return we all enjoyed in the past few years. But the tide has turned in the past 3 months and is now working against us. The dollar is strengthening rapidly against many emerging markets currencies and some have to take steps to shore up their currencies. The US$, for example, has gained 40% against the Brazilian Real since the end of July!
Another negative for many emerging markets: the implosion of commodity prices which used to represent a sizable share of their GDPs.
Also, as it turned out, we discovered that the money fueling growth in emerging countries came from the developed world. Now that we are in trouble ourselves, we are bound to see less capital flowing to developing countries. That will further put the break on growth.
This is my view on Emerging countries in general (you don't have to agree): Their economies still depend on us, the developed world, to consume and capitalize their growing economies. When we consume, they sell us more stuff and the price of commodities go up which works to their advantage. So before they can recover, we have to recover first and start consuming again. If you think, like I do, that it will take us maybe 2-3 years to recover, I am thinking that it will probably take emerging countries even longer. Between slowing growth and depreciating currencies, I don't think they look particularly cheap at the moment. But at some point, I think they will become very attractive again. When exactly, I don't know. But I am not buying right now. I am sure there are exceptions (China perhaps, whose currency is pretty stable and who can develop its own domestic market), so perhaps careful shopping could uncover some gems out there...