Thoughts on managing currency risk in EM equity plays when your base currency is strong?

asked by u/qing_watanabe · 20d · 3 answers

Hey everyone, been lurking for a while and trying to get my head around a few things as I slowly dip my toes deeper into EM. I'm primarily looking at long-term equity plays in places like Vietnam and India, but my base currency is USD. It feels like every time I find a solid local company, the potential gains are somewhat muted, or even outright challenged, by the $USD strength. I understand hedging is an option, but for smaller positions or longer holding periods, the costs seem to eat into the thesis pretty quickly. Is there a common approach to thinking about this? Do you just accept a certain amount of FX drag as part of the EM game, or are there specific strategies (beyond just avoiding countries with notoriously volatile currencies) that experienced folks here employ to mitigate this? It's something I'm still trying to square away in my risk models.

Join the full discussion

Top answers

  • u/rheadesai· 1 pts· 20d

    That's a classic dilemma for sure. Have you looked into any of the currency-hedged ETFs that track EM indices? They might give you a baseline for how effective those strategies are, even if you're picking individual stocks.

  • u/tuan_le· 1 pts· 20d

    That's a common challenge. While hedging currency risk can eat into returns, particularly with the cost of carry for some EM currencies, you could also consider a portion of your portfolio in businesses with natural hedges or significant export revenues to USD-denominated markets.

  • u/nattapong.sangthong· 1 pts· 20d

    เป็นประเด็นที่น่าสนใจครับ ผมคิดว่าถ้ามองยาวๆ การแข็งค่าของ USD อาจจะไม่ได้ส่งผลกระทบมากเท่าไหร่ ถ้าพื้นฐานของบริษัทใน EM แข็งแกร่งจริง แต่ถ้ากังวลเรื่องระยะสั้น อาจจะต้องพิจารณาพวก ETF ที่มี currency hedge หรือลงทุนในสินทรัพย์ที่มีรายได้เป็น USD ด้วยไหมครับ?

Related questions