Header image

A Small, But Important, Driver of Currency and Asset Valuations Throughout the Americas

While steep tariffs and current account deficits of late have sent emerging market (EM) currencies and equity markets into a tail spin, longer-term demographic trends may have larger consequences for asset prices in developing markets.  

As the world population ages, life expectancy extends outward and fertility rates drop, many analysts are expecting these trends to challenge growth in financial markets and the global economy. 

According to a Goldman Sachs report, demographics alone will produce a 16%, 15% and 9% variation over time across numerous countries in annual inflation, real bond yields and stock price-to-earnings (P/E) ratios. 

“In the US, over the next decade, demographics could lift inflation by 40 bps and real bond yields by 70 bps, while lowering the stock P/E ratio by 1.3 pts. However, these effects are likely to be dwarfed by cyclical fluctuations,” authors of the report state. The study estimated demographic impacts using data covering roughly 100 countries for inflation and 30 countries for asset prices. 

Yet, even the seemingly small variation in aggregate P/E ratios, thanks to demographic trends, and its effect on equity markets could have deeper implications for currency and asset valuationsOne industry study found that the valuation of some Latin American currencies is more swayed by domestic or overseas equity market gyrations while other currencies in the very same region are more influenced by commodity prices.  

“Equity markets are important in Brazil. A stronger BOVESPA is associated with a stronger Brazilian real, while a higher S&P 500 index is associated with a weaker exchange rate due to dollar strengthening. Moreover, the Eurostoxx has a significant negative effect on the exchange rate of Brazil, while the effect of Chinese Equity is positive but not significant. Therefore, a stronger Eurostoxx strengthens the Brazilian real, while a stronger Chinese Equity market will have a greater effect on the dollar,” state the authors of an Amundi Asset Management report.  

“On the contrary, a higher S&P 500 is associated with a stronger Mexican peso; the strong links between the US and Mexican business cycles make MXN a higher-beta play of the USD. The impacts of Eurostoxx and Chinese Equity indices are not significant in Mexico, which once again corroborates the strong link between Mexico and the United States. For Colombia none of the equity markets are significant, while for Chile only the Chinese Equity index has a statistical positive effect. For Peru, both the S&P 500 and Chinese Equity indices have negative effect, while the Eurostoxx index has a positive effect.” 
 
The Amundi report authors went on to conclude that commodity pricing was found to be of greater importance to the valuation of several Latin American currencies. While the study accounted for several factors in its Global Exchange Rate Factor, which included sovereign risk premium and credit default swap spreads, the authors examined the relationship between oil, copper, gold and others with the currencies of Brazil, Mexico, Peru, Colombia and Chile from December 2001 till February 2016. 

“For the Mexican and Colombian Pesos, oil prices enter with a statistically significant negative coefficient. Moreover, for the Chilean Peso (CLP), copper prices have a significant negative effect. For Peru, based on the variable selection methodology, three were the commodity prices that were found to have an impact on Peruvian Sol; copper, gold and oil prices,” the report states.  

Attaining a clearer view of how certain factors affect the valuation of currencies and domestically linked assets will help investors and corporate management teams become better stewards of their assets. The USD 5.3trn FX market is a key market for investors and market participants to understand. The world economy is increasingly transnational in nature, with both production processes and trade flows often determined more by global factors than by domestic considerations, especially considering 60% of S&P 500 companies generating revenue overseas. Moreover, almost all companies are exposed to some degree of foreign competition, and the pricing for domestic assets—equities, bonds, real estate, and others—will also depend on demand from foreign investors. All of these various influences, including changing demographics, on investment performance will reflect developments in the foreign exchange market. 

The authors of the Goldman Sachs report state for market players not to overstate the effects of demographics as “cyclical factors … seem to be the main driving force behind asset price fluctuations.” While much attention has been paid to developed markets, such as the US and Japan, when the discussion has centered around demographic trends, it is noteworthy that between 2017 and 2050, the share of population aged 65+ is expected to rise by 15.7% in China and by 14.4% in Brazil. 

The matter of demographics, currency and asset valuations, interest rate movements and economic developments will be discussed at several Acuris events. On December 11 in New York City Debtwire will host its annual Latin American Forum while on December 5 in Bogota, Colombia Mergermarket will host its inaugural Andean Community M&A Forum and its Mexico M&A and Private Equity Forum on October 24 in Mexico City.  

Matt O'Brien Content Editor Acuris Studios (moderator)

Matt is content editor for Acuris Studios, the sponsored events and publications division of Acuris Global, since 2016. He curates content for the events team by overseeing research of market trends and transactions relating to corporate M&A and project finance. Matt works with the news editors and reporters of Acuris’ various publications, meets with market practitioners, and stays current with recent developments to ensure the company delivers industry-leading conferences. He also blogs about economic and market trends that affect the financing and structuring of M&A transactions and projects throughout the Americas.

Matt spent nine years in the news reporting industry covering a wide variety of industries and beats as a freelancer and as an employee with various publications. For five years, he worked in the financial services sector conducting research and relationship management for the mass affluent clients of AXA Advisors and then Wells Fargo.

Matt holds a B.A. from Rutgers University where his degree was in Political Science and History. He graduated in 2003.

Follow Matt on Twitter and LinkedIn.

Matt O'Brien Content Editor Acuris Studios (moderator)

Matt is content editor for Acuris Studios, the sponsored events and publications division of Acuris Global, since 2016. He curates content for the events team by overseeing research of market trends and transactions relating to corporate M&A and project finance. Matt works with the news editors and reporters of Acuris’ various publications, meets with market practitioners, and stays current with recent developments to ensure the company delivers industry-leading conferences. He also blogs about economic and market trends that affect the financing and structuring of M&A transactions and projects throughout the Americas.

Matt spent nine years in the news reporting industry covering a wide variety of industries and beats as a freelancer and as an employee with various publications. For five years, he worked in the financial services sector conducting research and relationship management for the mass affluent clients of AXA Advisors and then Wells Fargo.

Matt holds a B.A. from Rutgers University where his degree was in Political Science and History. He graduated in 2003.

Follow Matt on Twitter and LinkedIn.

Join My Debtwire Events

Get exclusive content from our leading fixed income events.

Watch sessions again, download presentations and get exclusive interviews.

Connect with an international community of fixed income professionals via our event networking app (for attendees only).

Sign-up to My Debtwire Events to join the community.

Sign Up

Read Privacy Policy

Debtwire Events
Debtwire transformed the market and quickly became the leading provider of expert news, data and analysis on global leveraged credit. With global breadth and local depth, our end-to-end coverage goes behind the scenes from primary issuance to the first sign of stress through restructuring and beyond. Subscribers trust Debtwire – the pioneer in the industry – for comprehensive coverage across geographies, companies and asset classes. Backed by Debtwire’s team of experts and award-winning content, our events offer attendees an unrivaled perspective.