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Dogs of the World, Dollar & Currency Markets
July 24, 2018

Trade war drums are beating in 2018 as the Trump administration implemented and has threatened to implement nearly $1 trillion in tariffs on exports into the U.S. The drum beat got louder last week as the administration threatened $500 billion in tariffs on Chinese exports with China threatening to retaliate with more tariffs on the U.S. Traders expect a trade war to hurt the Chinese and the economies of emerging market nations more than the U.S. economy. The Atlanta Federal Reserve's GDP NOW estimate is at 4.5% annualized for the second quarter of 2018, which is fueling higher U.S. Treasury Bill yields.

The Arrow Insights (AI) Dogs of the World Index – ex USA (AIDOGS) selects the five worst performing countries among a universe of 44 developed, emerging and frontier countries at the end of each November with implementation on the last trade date of the year. AIDOGS allocates 30% to the worst country, and 17.5% in the remaining dogs. For the most part, since April 30, 2009, AIDOGS has gained as the MSCI Emerging Markets Stock Index has declined. Emerging market stocks decline more when the U.S.–dollar–(USD) to–emerging–market–currency ratio rises as investors sell the Chinese yuan and emerging country currencies and buy the USD, especially since the end of 2016 (yellow vertical line, Figure 1). The narrowing of the yield spread between U.S. yields and Chinese/emerging market yields supports the current trend in currencies.

Highlights– Data ends July 20, 2018
  • Since April 30, 2009, AIDOGS and the MSCI Emerging Markets Stock Index have recorded total returns of 238.1% and 61.5%, respectively (Figure 1).

Figure 1. AIDOGS Bests Emerging Markets Stocks


Chart courtesy of StockCharts.com. Performance prior to December 14, 2017 was based upon back testing the AIDOGS methodology (Source: Thomson Reuters).

AIDOGS expresses a rationale that the worst performing stocks within the worst performing country markets will revert to their historic mean return (mean reversion). Historically, AIDOGS has been more volatile than SPXTR, but less volatile than the MSCI Emerging Markets Stock Index (not shown in Figure 1). These factors should cause index investors to favor allocating part of their global allocation to AIDOGS with the allocation sourced from their customary allocations to the foreign stocks.

DISCLOSURE: This report does not provide tailored investment advice. It was prepared without regard for specific circumstances and objectives. The securities shown may not be suitable for all investors. Arrow Insights recommends that investors independently evaluate particular investments and strategies. The appropriateness of an investment or strategy will depend on investor circumstances and objectives.

The contents are not an offer to buy or sell any security or to participate in any trading strategy. Arrow Insights and its affiliates or its employees not involved may have investments in securities or derivatives of securities of companies mentioned in this report, and may trade them in ways different from those discussed in this report.

Arrow Insights and its affiliate companies conduct business related to securities covered in its research reports, which may include market making and specialized trading, risk arbitrage and other proprietary trading, fund management, and investment services. Arrow Insights makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change apart from when we intend to discontinue research coverage of a subject company.

Reports prepared by Arrow Insights research personnel are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals affiliated with Arrow Insights.

HYPOTHETICAL RESULTS ARE BASED ON CRITERIA APPLIED RETROACTIVELY WITH THE BENEFIT OF HINDSIGHT AND KNOWLEDGE OF FACTORS THAT MAY HAVE POSITIVELY AFFECTED ITS PERFORMANCE AND CANNOT ACCOUNT FOR ALL FINANCIAL RISK THAT MAY AFFECT THE ACTUAL PERFORMANCE OF THE FUNDS. NO HYPOTHETICAL PERFORMANCE RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK, INVESTOR BEHAVIOR, OR OTHER MARKET FACTORS – ANY OR ALL OF WHICH CAN IMPACT ACTUAL PERFORMANCE RESULTS. THERE ARE OFTEN VAST DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND ACTUAL PERFORMANCE. NO REPRESENTAION IS BEING MADE THAT ANY COMBINATION OF INVESTMENTS WILL ACHIEVE SIMILAR PERFORMANCE RESULTS TO THOSE ILLUSTRATED.

Past performance is not a guide to future performance. Any estimates of future performance are based on assumptions that may not be realized.



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