Though the preconditions do seem similar, there are many unknowns in the current pandemic environment. One is the ability of emerging market economies to recover quickly. Though Asia recorded lower levels of COVID-19 sickness and fatalities, the region has been hit hard economically. With the exception of China, most other EM countries saw GDP contract in 2020. But as vaccines gain momentum in late 2021 and 2022, pent-up global demand and trade should recover. There's already evidence: December 2020 data showed the Chinese monthly trade surplus hitting a record $80 billion globally, nearly half of that with America — even as the 2018 Trump trade tariffs remain in place.
Another wild card may be U.S. interest rates relative to other markets worldwide. Though the Fed is expected to keep short-term rates near zero through 2022, dozens of emerging markets central banks have also dropped rates to record lows. Just in the last few weeks bond hawks have demanded higher longer-term U.S. rates, thereby steepening the yield curve and making the greenback more attractive. A good sign of the dollar weakness cycle would be seeing EM rate hikes with a steady U.S. yield curve. Both of these will depend on how fast economies recover which, again, is tied to vaccine rollouts and the end of the pandemic.
In terms of a new resurgence in commodities, oil's influence in this cycle may be different. For much of the last 50 years, America's persistent crude imports resulted in U.S. dollars flooding the world. But things have changed a lot since the global financial crisis. According to the Energy Information Agency, the U.S. has boosted domestic oil production to nearly 11 million barrels a day at year-end 2020 from about 5 million a day in 2007. Moreover, there have been peak months of more than 13 million barrels produced when the U.S. was actually a net exporter. American oil exports in a global recovery could actually reduce the U.S. trade deficit.
Finally, geopolitics and unforeseen crises could spark a flight to safety. Flare-ups in Iran, North Korea, the Taiwan Strait or South Seas all could create a run to the U.S. dollar.
Fundamentals suggest this multiyear U.S. bear cycle might have begun, ending the long bear cycle in emerging markets. Though investors may not have caught the COVID-19 lows of last March, it might not be too late to jump in if the multiyear cycle repeats itself.
Peter Marber, New York, is portfolio manager, CIO of New World Opportunities Fund and head of emerging markets at Aperture Investors LLC. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.