The passive devaluation of the US dollar and the potential for emerging market currency appreciation are changing the playing field for investors seeking to tap into Asian and Latin American growth. To date, the "currency war" has done little to cool investors' ardour for emerging markets. Such plays, indeed, helped drive world stocks to more than two year highs last week.
But shifts in currency rates, epitomised by the dollar's recent four-month fall of more than 15 percent against major currencies, can impact everything from product demand and costs to borrowing to the repatriation of profits.
So the potential for a new currency landscape is set to make life more complicated for investors, particularly those seeking to buy large developed-market multinational equities with solid exposure as proxies for emerging markets.
There will be an array of positive and negative factors to balance. Consider, for example, the impact of a strengthening yuan on US and European companies plans to make direct investments or joint ventures in China. If Washington gets its way and persuades Beijing to re-value, China will get more expensive.
This would mean additional costs to companies whose plans have not yet been implemented. But the flip side for investors is that companies with an existing presence would have a competitive edge.
"Anyone who wants to invest in China after a revaluation has taken place has to pay more in his own currency to do that," said Karl Sauvant, executive director of the Vale Columbia Centre on Sustainable Investment, in New York. "That is why those who are there (already) would have an advantage."
Sauvant reckons the prospects for currency appreciation in emerging markets may prompt companies with investment plans to bring them forward - another bottom-line cost implication for equity investors to grapple with.
In theory, a developed-market company with high exposure to emerging markets should benefit from depreciation of its home currency in two ways - because their goods are cheaper and because the new exchange rate boosts their foreign profits.
But this tends to reflect an old model of business for many companies as it assumes they produce goods at home and then export them. Many large companies now produce their goods in situ. Volkswagen, for example, has nine production facilities in China and plans by 2014 to have doubled its China production capacity to 3 million vehicles a year.
For companies with manufacturing presences in countries with appreciating currencies, the exchange rate effect will be muted. They may even find that the deflationary impact of a higher rate will weaken the very domestic demand that they are there to exploit in the first place.
Ranged against that, however, would be reduced costs for raw materials such as oil in emerging market plants because these are for the most part priced in dollars.
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