EM Banks And Energy Benefit when Commodities Rise And The Dollar Strengthens
Since Trump’s election the market has seen aggressive rotation into cyclical asset classes and out of bond proxies on the expectation of higher growth and higher inflation. US Treasury yields have soared along with base metals and the US dollar has broken out of its two year trading range.
Emerging markets have suffered due to the stronger dollar however Bank of America Merrill Lynch notes that the “rare” combination of a higher US dollar and higher commodities is bullish for emerging market assets (since 1970 higher USD and higher commodities have happened 30% of the time). When we’re in this type of environment energy and banks are the best performing sectors, see below: