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