Emerging-market currencies from South Africa’s rand to Turkey’s lira and Indonesia’s rupiah are benefiting from the crisis in Ukraine as investors move funds out of Russia and into other high-yielding markets.
The rupiah and rand were the biggest gainers among 24 developing-nation peers over the last five days, strengthening about 1.6 percent versus the dollar, while Russia’s ruble and currencies across eastern Europe were among the main losers. Since the July 17 downing of Malaysian Airlines flight MH17, an index of 20 emerging currencies has jumped 0.8 percent from its lowest level in a month.
While global investors have withdrawn $199 million from Russian bond and equity funds this month, they bought the most Indonesian stocks since March and added holdings of South African bonds, according to data compiled by EPFR Global and stock exchanges. Benchmark borrowing costs in countries such as Turkey and South Africa are at least 6 percentage points above those of the U.S., ranking the highest among developing countries along with Russia.
“Flows to emerging-market funds seem to be continuing, and they have to invest somewhere,” Simon Quijano-Evans, the head of developing-nation research at Commerzbank AG in London, said by phone on July 21. “Russia has come under pressure, while the rand and lira have benefited from capital outflows from there.”
Improvements in many developing nations’ trade balances have made investors more willing to keep money in emerging markets than in past crises, according to Barclays Plc.
This month’s outflow from Russian funds pushed withdrawals to $348 million since the end of February, just before the former Soviet Union country annexed Ukraine’s Crimea region, according to data compiled by EPFR Global, a Cambridge, Massachusetts-based company that tracks asset flows. Investors added a combined net $12.9 billion across emerging markets in the same period.
“The inflows to emerging markets reflect a combination of factors: the reach for higher yield” and “improved” fundamentals, Koon Chow, the head of emerging-market strategy at Barclays in London, said in a July 17 note to clients. “Russian developments are likely to divert money into other EM markets rather than scare investors away from EM.”
Sentiment toward Russian assets has soured further since the shooting down of the passenger jet over rebel-held eastern Ukraine. The U.S. says the missile used was probably supplied by the Russian military.
European Union foreign ministers are debating whether to expand its sanctions against President Vladimir Putin. The standoff is complicated by Russia’s status as the world’s largest energy exporter, supplying about 30 percent of the EU’s natural gas.
The rally in developing-nation currencies will end if the conflict deepens and drives up volatility, according to Lars Christensen, the chief emerging-markets analyst at Danske Bank A/S in Copenhagen.
“We are quite negative in our outlook for Russian markets, but that doesn’t mean there is a benefit for others,” Christensen said in a phone interview on July 22. “An escalation of the crisis in Ukraine is harmful for all emerging markets.”
JPMorgan Chase & Co.’s gauge of price swings in emerging-market currencies fell to a record 5.81 percent today, making it more attractive for investors to buy higher-yielding assets.
Countries from Turkey to South Africa have taken measures to cut their trade deficits while raising interest rates since the last crisis to hit emerging markets. Developing-nation currencies tumbled in January when deadly protests in Ukraine and Thailand shook investor confidence that was already hurt by an economic slowdown in China and the reduction of the Federal Reserve’s monetary stimulus.
At 11 percent, the three-month deposit rate in Turkey is the second-highest in developing countries after Argentina, Bloomberg data show. That compares with 9 percent in Russia, 8 percent in Indonesia and 6.5 percent in South Africa.
Global funds have bought a net $515 million of South African bonds this month, extending inflows this year to $1.8 billion, according to Johannesburg Stock Exchange data. The rand has strengthened 2.4 percent since July 17 when the central bank raised its policy rate by a quarter point to 5.75 percent.
In Indonesia, foreign investors bought $1.03 billion more local stocks than they sold this month, set for the biggest monthly net inflow since March. The rupiah extended its gain for the month to 3.1 percent as Joko Widodo won the nation’s presidential election. Suharto-era General Prabowo Subianto rejected the vote count and said he’ll challenge it in the constitutional court.
Societe Generale SA recommended on July 18 that its clients buy the rand against the ruble to hedge an “escalation of geopolitical risks” as investors look for high-yielding assets in less volatile regions.
Standard Chartered Plc, which gets more than half of its revenue from emerging markets, said the same day that traders will flee Russia for other developing-country assets, including the rupiah, as they did in the first quarter following Putin’s incursion into Ukraine.
“The yield play is still there,” Saktiandi Supaat, the head of foreign-exchange research at Malayan Banking Bhd., said in a July 22 phone interview from Singapore. “The low-volatility environment and the easier global monetary conditions support riskier assets.”