Citigroup recommends waiting for a weaker dollar before investing in emerging market equities

on Nov 29, 2019
Updated: Apr 28, 2020
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  • Citigroup recommends waiting for weaker U.S dollar before investing in emerging market equities.
  • Chinese money supply growth can fuel private consumption and investments.
  • MSCI World Index has gained 22% this year while MSCI Emerging Market Index has gained 9%.

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Despite the rising trade tension between the United States of American and China following Trump’s signature on Hong Kong’s prodemocracy bill, investors are still trying to sustain the risk appetite in the financial markets. Those who are interested in putting their money into the emerging market (EM) equities are recommended by Citigroup Inc. to wait for two events to occur before they invest their money; a weaker U.S dollar and a hike in the Chinese money supply.

Trade Optimism Failed To Fuel Outperformance In EM Stocks In The Past Weeks

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A group of strategists from Citigroup, including Jeremy Hale, has recently recommended the investors to be cautious of investing in the stocks of developing nations until fundamental growth indicators start to become evident. The group has further remarked that the trade optimism in the past weeks has failed to fuel outperformance in such stocks.

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In a statement on Thursday, the strategists commented:

“When China nominal policy rate easing, that Citi expects in 2020, feeds through to M2 growth, we may see a more pronounced inflection point for improved EM risk-taking. For us, a turn in the dollar is also one of our signals for increasing EM exposure”.

While the complications in an imminent trade deal between the two largest economies of the world are currently evident, Washington and Beijing were largely optimistic about the phase 1 deal before President Trump’s signature on the Hong Kong bill. The positivity circling the trade deal merged with the analysts’ view that the global economic slowdown is starting to fade away, saw the developed-market stocks printing record highs in November.

As per the report, the MSCI World Index has gained 22% this year. The MSCI Emerging Market Index, on the contrary, has noted only a 9% increase (year-to-date), while the index continues to trade significantly below the peak registered in 2007.  

Increase In Chinese Money Supply Can Fuel Private Consumption And Investments

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The Citi Strategists have further added that leniency in Chinese monetary policy has been focused on a weaker yuan that doesn’t help the local risk assets. In order to fuel investment, lending, and private consumption, a sharp increase in the money supply from China is required that will help push the Emerging Market assets further higher in the long run.

On the other hand, a weaker U.S dollar is known to support commodities that can help initiate the long-awaited outperformance phase for the emerging markets. As per the Citigroup recommendation, a drop in Bloomberg Dollar Spot Index from the current 1209 to below 1190 (1.5%) is required for the emerging market equities to benefit from the weaker dollar.

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