Emerging Market Currencies Roil Stocks

In addition to the growing concerns about global economic growth, the Chinese stock market sell off and yuan devaluation and falling oil prices, markets are increasingly spooked by other emerging market currencies and stock prices.

An average of 15 emerging market currencies is down about 10 percent so far this year while countries with large commodity exposure are suffering even more.  For example, so far this year, the Russian ruble is down -17 percent, the S. African rand has fallen -13 percent and the Brazilian real has lost more than 25 percent of its value against the dollar.

Although it’s immaterial on the world stage, the Kazakhstan tenge fell by more than 25 percent after their central bank stopped its loose peg to the dollar.  Other small currencies like the Turkmenistan manant, the Tajikistan somoni, the Armenian dram and the Kyrgyzstan som are also at risk.

While these financial fringe currencies really don’t matter to us much (I just like the names), the performance of larger, more relevant currencies impact us for two reasons.

First, in the narrow sense, the falling currencies are hurting our stock market exposure, but not by as much as some of the numbers above would suggest.

Although we don’t use the iShares emerging market ETFs anymore (although some old clients have them because of their low cost basis), they are useful to look at because iShares offers both currency hedged and unhedged versions.

The unhedged version, which is similar to what we do own for clients today, is down -13.2 percent for the year.  The hedged version, which we don’t own, is down -9.0 percent, so we can say that the currency exposure has subtracted from the returns, but by less than five percent by this measure.

The second, broader reason that falling emerging market currencies impact us is that this kind of volatility is unsettling, as we can see from stock prices today.

While it is bothersome, I also think that now is a good time to remind ourselves that stocks are risky investments, which is why we almost always pair them with bonds in a diversified portfolio and those bonds are behaving exactly as we want them to during a stock market rout by moving higher in price.

And, really, we’re only about four percent off of the all-time high for the S&P 500 set in May, meaning that we’re only half way to a correction, which is defined as a 10 percent fall from the high.

It’s been easy to forget over the last six years, but stock market investing is tough, but we’ve worked hard with our clients to make sure that the chances are high that they can continue with their lifestyle through all kinds of market environments just like this one.