The most-accurate forecasters of Asian currencies say it’s time to avoid the South Korean won and the Indian rupee as the global economic recovery falters.
Goldman Sachs Group Inc., which correctly predicted the Malaysian ringgit’s gain this year, has stopped recommending the region’s currencies and says the rupee will drop 2 percent this quarter. ING Groep NV, which had the closest forecasts for the weakening won and Taiwan dollar, is among the most bearish for their second-half performance.
Strategists got it wrong at the start of the year when the consensus in Bloomberg surveys was that the won would appreciate the most in Asia and the ringgit would be the region’s weakest currency. Instead, South Korea’s currency dropped 5 percent and Malaysia’s climbed 7 percent. Now, Invesco Ltd. and Daiwa SB Investments Ltd., which together manage $482 billion, are avoiding the region’s higher-yielding assets as Europe’s debt crisis spreads.
“Episodes of risk aversion will see the won and rupee underperform and give strong support to the dollar,” Tim Condon, chief Asia economist in Singapore for ING, the biggest Dutch financial services company, said in an interview yesterday. “They may appreciate as markets calm down, but the path won’t be smooth.”
China’s Premier Wen Jiabao said on July 3 that the effects of the global financial turmoil are more severe than expected, after a Federation of Logistics & Purchasing report showed manufacturing growth slowed for a second month in June. Markit Economics reported on July 5 that expansion in Europe’s services and manufacturing industries also weakened for a second month.
The won slumped 8 percent in the past three months to 1,222.3 per dollar, the worst performer in Asia, while the Indian rupee declined 5 percent to 46.905. Financial-market “stresses” may damp global economic activity in the second half, the International Monetary Fund said on June 16, before releasing forecasts this month. In April, the IMF projected Asia’s 8.7 percent expansion this year would lead 4.2 percent growth worldwide.
China’s property market is beginning a “collapse” that will hit the nation’s banking system, Kenneth Rogoff, the Harvard University professor and former chief economist of the International Monetary Fund, said in an interview in Hong Kong yesterday. He said the global economic recovery is “very slow.”
“Europe’s debt crisis has some contagion effect on Asian currencies,” said Paul Chan, Hong Kong-based chief investment officer at Invesco, which oversees $430 billion globally. “It was a trigger for outflows of hot money.”
The won is the most exposed to changes in investor appetite for riskier assets. Its correlation in the past year to the Chicago Board Options Exchange Volatility Index, a measure of U.S. share-price swings, was Asia’s highest at 0.75, followed by the rupee’s at 0.66. A reading of 1 suggests movement in lockstep. The ringgit’s relationship was the lowest at minus 0.02. The won’s one-month implied volatility, used to calculate foreign-exchange options, is the highest among Asian currencies at 17 percent.
ING says the won will rise 6 percent in the rest of 2010 to 1,150, more bearish than the median estimate in a Bloomberg survey of 19 economists for an 11 percent gain. There’s a risk it may end at 1,200, an increase of less than 2 percent, Condon said. The company predicts the ringgit will decline to 3.27 from 3.23 this quarter and the rupee to 46.50 from 46.46.
Standard Chartered Plc, which had the same won forecast as ING at the start of 2010, is more bullish, predicting the currency will rally 11 percent to 1,100 as the yuan’s appreciation makes Korean exports more affordable for Chinese consumers. China’s currency has gained 0.7 percent since the central bank ended a two-year dollar peg on June 19.
“Robust regional growth should in particular favor countries like Malaysia and Korea that are closely integrated to the broader region,” Michael Hasenstab, who oversees the $34 billion Templeton Global Bond Fund in San Mateo, California, said in an e-mailed response to questions. “The yuan still remains undervalued.”
Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs in Hong Kong, advises against buying Asian currencies. The New York-based bank, which along with Barclays Plc and Danske Bank A/S was among the three best ringgit forecasters, lowered its 2010 economic growth forecast for China to 10.1 percent from 11.4 percent on July 2.
“This isn’t a good time to be long these currencies,” Buchanan said in a June 30 interview. “For most cases, there is still room for appreciation but the risk-reward doesn’t entice.”
Goldman Sachs in a June report dropped its forecast for the rupee to 47.50 by September, from an earlier prediction of 44. It cut its prediction for the won to 1,150 from 1,100, and for the ringgit to 3.15 from 3.10.
Goldman, ING and Standard Chartered are all bearish on the rupee, after the current-account deficit widened to a record and investors sold India’s stocks. The current-account gap reached $13 billion in the first quarter, from $12.2 billion in the fourth, which is “not what the market is looking for,” Goldman’s Buchanan said.
Foreign investors sold a net $5.4 billion of stocks in South Korea in May and $2 billion in India.
“I’m not very confident on Asian currencies at the moment as it depends very much on global risk sentiment,” said Kei Katayama, who helps oversee the equivalent of $37 billion in non-yen debt as leader of the foreign fixed-income group in Tokyo at Daiwa SB.