The Impact of US Policy on Emerging Markets—Dollar Concerns “Overdone”

Continued US dollar strength has focused attention on weaker commodity prices and dented investor enthusiasm for emerging markets in recent months—stoking fears that the current climate could lead to a repeat of the 1997-1998 Asian Financial Crisis. However, Chetan Sehgal, Franklin Templeton Emerging Markets Equity, feels these concerns are largely overdone. He believes the last two decades of mass financial reforms have transformed emerging Asia’s financial markets.

In part two of this series, “The Impact of US Policy on Emerging Markets,” Chetan outlines the progress he’s seen in emerging Asia’s financial markets. He also explains why he thinks the US dollar’s influence doesn’t necessarily have to dim the prospects for emerging markets.

Since the 1997-1998 Asian Financial Crisis (AFC), investor sentiment on emerging markets has tended to sour during periods of US dollar strength and lower commodity prices.

Back in 1997, a rush of foreign investment and series of asset bubbles precipitated the crisis at the same time the US Federal Reserve began to raise interest rates, causing the US dollar to strengthen. Servicing costs for dollar-denominated debt also became increasingly difficult to meet. Meanwhile, Thailand’s step to remove its currency peg to the US dollar left Asian economies vulnerable and subject to speculative currency attacks.

But 20 years on from the AFC, we regard the economic landscape in many emerging markets as fundamentally stronger than it was back then. Our experience suggests investors should focus less on what’s going on in the United States, and more on the developments on the ground in the countries themselves.