Emerging equities, a positive 2024 but paying for the return of the dollar
Emerging market equities closed 2024 on a positive note, but the last few months of the year just ended saw some of the accumulated gains eroded under the blows of a dollar that had returned to show its muscles. 2025, consequently, started with a decidedly red colour, let’s take a closer look at the situation.
Comparing the emerging markets basket (etf: EEM) with the developed countries equity net of US listings (etf: VEA), we observe that the relative strength ratio is overall in favour of the emerging markets. The ingredients for this strength were many: a recovery in corporate profits, a long period of undervaluation of the region, and expansive monetary policy interventions.
Elements that had allowed emerging markets to ‘hold their own’ even against US equities. We see this above, with the strength ratio remaining sideways until last summer and then tending to collapse, falling below the long-term average.
It was the dollar that made a comeback in this period, and its recovery stopped the run-up of the emerging markets. In the graph above you can clearly see the comparison between emerging markets and the Dollar Index. You can see in particular the gradual weakening from the beginning of autumn onwards.
Emerging equities and the dollar definitely do not get along. Above we see the correlation trend between the two assets over the past 10 years. The average, over different time horizons, always remains below the -0.60 point threshold, indicating a rather pronounced negative correlation.
