At the start of 2023, after a rough 2021 and 2022 for emerging market equities, we wanted to revisit what we consider to be a key (possibly the key) driver for the asset class: the direction of the US dollar and the capital flows that result from that.
As a whole, EM economies and the EM equity asset class are dependent on external capital flows. Economies more driven by domestic demand require capital inflows to finance current account deficits, while the economies with stronger export bases tend to have significant exposure to demand from emerging markets (eg Korean car company sales in India) as well as having dependency on foreign financing of corporate investment.
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