(Yicai) Feb. 19 -- The outlook for emerging markets remains grim this year as global trade is expected to further contract, and the US dollar should stay strong even if the Federal Reserve cuts interest rates, according to the chief strategist of emerging markets at Canada's BCA Research.

Arthur Budaghyan from the Montreal-headquartered investment research firm responded to Yicai's questions about foreign trade, rate cuts, and the strong greenback. Below are excerpts from the interview.

Yicai: Has the market been too optimistic about the Fed's rate cuts? Where is the US dollar headed in 2024?

AB: I agree that the market has gotten ahead of itself in pricing in Fed rate cuts. I don't think the Fed is going to cut in March. So in fact, I think Jerome Powell did the right job pushing back against early and aggressive Fed cuts. The US economy is not that weak to justify a larger rate cut. And I think in the near term bond yields will move higher as the market prices out very large and very early rate cuts by the Fed.

The US dollar fell sharply in November and December when the market started pricing in rate cuts. As that process is reversed, the US dollar will go up. So I have been and will remain bullish on the US dollar. So I think the US dollar is going to be strong for the next two months.

Beyond next month, I think the dollar will keep strong even if the Fed starts cutting interest rates and I think that will be the biggest kind of surprise for this year. It is because the US dollar is a counter-cyclical currency: it typically goes up when global growth is weakening and global growth will be weakening this year. Second, even though the US economy will weaken too, I think the rest of the world, especially Europe, is weakening faster than the US.

Yicai: Will investors continue to flock to American capital markets in a high interest rate environment and what does this mean for emerging markets?

AB: Clearly when the US dollar is strong, emerging markets are weak and underperforming. That's a pretty stable and long-term relationship and I expect it to play out this year.

The environment this year will be negative for emerging markets. I'm not sure US equities will go up, as the S&P 500 and the US dollar sometimes are positively correlated, and sometimes negatively correlated. There has been no strong correlation between the S&P 500 and the dollar. I think it all depends on profits. If US profits disappoint as I expect, the US market will go down, even though the US dollar goes up.

The link between emerging markets and the dollar is not just a direct relationship. In fact, the fundamental relationship for emerging markets to underperform is weak global growth. When global growth, global trade, and global exports are weak, emerging markets typically do poorly. I expect global growth and global exports to be weak.

Yicai: The IMF predicts that global trade will grow by 3.3 percent in 2024, well below the historical average of 4.9 percent. Do you think global trade will bottom out in 2024?

AB: I think global trade will contract for most of 2024. I think the IMF forecast is on a positive side, more optimistic than I would think. And we’re witnessing some improvement in Asian exports, but it is probably a temporary improvement driven by the semiconductor cycle demand for AI chips.

Overall, I would say global trade will contract this year. I think a positive view of global trade is misplaced. Even though global trade was already contracting for 18 months, we cannot expect things to keep falling for several years in a row. So within any major cycle, there is a mini cycle. So the way I think about the recent improvement in Asian exports, I think it's a mini cycle, a short-term improvement within a longer downturn.

So I think it’s a mid-cycle improvement in global trade that we’re witnessing. And the IMF is basically upgrading its forecast, but I think global trade will start disappointing again, especially in the second half of this year.

Editors: Dou Shicong, Emmi Laine