Emerging-Market Losses Break From Global Stock Gains: CurrenciesYe Xie
For only the third time since 2001, emerging-market currencies are weakening as global stocks rise, revealing doubts about the ability of economies from South Africa to South Korea to reverse a slowdown.
A group of 20 developing-nation currencies lost an average of 0.3 percent this year, including losses of more than 5 percent for the rand and won, while the MSCI World Index of equities advanced 8.3 percent. The 60-day correlation between the group and the stock index fell this month to the lowest since October 2008, data compiled by Bloomberg show.
Currencies that typically benefit most from an increase in investors’ appetite for risk are falling out of favor as emerging-market nations struggle to boost growth. Developing-country economies will expand at about the slowest pace in a decade relative to advanced nations, and their current-account surpluses will shrink to the least since 2001 as export markets contract, according to the International Monetary Fund.
“The model of global growth has been broken,” Stephen Jen, the managing partner at SLJ Macro Partners LLP in London and the former head of currency strategy at Morgan Stanley, said in a phone interview. “Those countries with questionable fundamentals in emerging markets are exposed, one by one, by the deceleration. They are starting to feel the pain.”
The won sank to 1,144.82 per dollar on April 9 and Taiwan’s dollar touched NT$30.058, their weakest levels in more than eight months. The rand lost 6.5 percent this year to 9.0667 per dollar. The Hungarian forint’s 1 percent drop versus the euro this year leaves it 10 percent weaker since April 2011.
The won pared that decline today, climbing the most in more than two months after the U.S. agreed to work with China, Japan and South Korea to try and draw North Korea back into nuclear talks. The currency strengthened as much as 0.9 percent to 1,119.38 per dollar, data compiled by Bloomberg show.
Correlation between emerging-market currencies and the global stock index fell to 0.57 on Feb. 11, the lowest in more than four years, before ending last week at 0.61, according to data compiled by Bloomberg. A reading of 1 means they move in lockstep, while minus 1 means they move in opposite directions.
The only other periods since 2001 when emerging-market currencies fell during a stock rally were in the final quarter of 2011, when the MSCI World Index climbed 7.1 percent, and in the last three months of 2010, when the gauge rose 8.6 percent.
JPMorgan Chase & Co. recommended March 25 that its clients hedge the currency exposure in emerging-market local-currency bonds for the first time since September.
Analysts including New York-based Holly Huffman on April 9 cut their forecasts for local bond returns this year to as low as 6 percent, from 8 percent, citing currency weakness. Credit Suisse Group AG lowered its estimate for Asian currencies on April 8, saying the won will fall 6 percent in 12 months.
The performance is mirrored in other assets. The MSCI Emerging Markets Index of stocks has lost 4.3 percent this year, compared with an 11.4 percent gain in the Standard & Poor’s 500 Index. Since the end of 2009, emerging-market stocks returned 3 percent, versus 42 percent for the S&P.
“People are a bit disappointed with emerging markets,” Bhanu Baweja, a strategist at UBS AG in London, said in a phone interview from London. “What has changed is that your growth trend is failing. That’s a big problem.”
On average, developing countries’ exports will rise 5.6 percent this year, compared with average growth of 10.8 percent in the five years through 2007, according to IMF estimates.
The sovereign-debt crisis in the euro region is hurting emerging economies, while the recovery in the U.S. is mostly boosting other developed nations because it’s concentrated in sectors such as housing and autos, said Baweja.
Developing countries will expand 5.5 percent this year, compared with 1.4 percent for advanced economies, the IMF forecast in January. The difference between the two groups is close to the smallest since 2002.
In countries such as Brazil and India, credit-fueled consumption growth is hitting a wall after current-account deficits widened to the most since at least 2002, analysts at Goldman Sachs Group AG wrote in an April 4 report.
China’s exports rose 10 percent in March from a year earlier, the government said on April 10, trailing economists’ forecasts for the first time in four months. Brazil’s retail sales declined 0.2 percent in February from a year earlier, the first annual drop in a decade.
Industrial output and manufacturing data suggest that the economic rebound starting in late 2012 is petering out, Roger Bootle, the managing director at Capital Economics Ltd. in London, wrote in an April 10 report. Emerging-market nations’ economic activity fell short of economists’ forecasts by the most since July, according to data compiled by Citigroup Inc.
BHP Billiton Ltd., the world’s biggest mining company, sees growth in China “trending down” toward 6 percent, Chief Financial Officer Graham Kerr said at the Bloomberg Economic Summit in Sydney on April 10.
China is the world’s second-largest economy and the Melbourne-based miner’s biggest customer, and its slowdown represents the main risk to the company’s prospects, Kerr said. China grew 7.7 percent in the first quarter from a year earlier, the National Bureau of Statistics in Beijing said today, after expanding an average 11.6 percent in the decade through 2011.
“They cannot rely on the levered-up, developed-market consumers anymore,” said Rashique Rahman, an emerging-market strategist at Morgan Stanley in New York. “That source of growth is gone. Fundamentals are just not as supportive for emerging markets” as they were 10 years ago.
Higher-yielding currencies recouped some of their losses last week amid speculation Japanese pension funds and insurance companies will buy emerging-market debt to boost returns.
The forint, Polish zloty and Brazilian real gained at least 2 percent and the rand climbed more than 1 percent since April 4, when the Bank of Japan said it will boost purchases of Japanese government bonds. The next day, yields on the nation’s 30-year notes fell to as low as 1.04 percent.
Citigroup estimates Mexico may attract $20 billion of inflows from Japanese investors, pushing the peso through 12 per dollar for the first time since August 2011. The peso strengthened to 12.0194 last week, from 12.8533 on Dec. 31.
“The recent policy signals from the BOJ have been a game changer for risky assets, including for global emerging-market currencies,” Benoit Anne, head of EM strategy at Societe Generale SA in London, said in a client note on April 11. “The market backdrop has changed dramatically over the past few days. Some differentiation continues to be key, of course, but the important development is the strong rejuvenation of the hunt for yields as a major market-driving theme.”
The rally in higher-yielding, developing-nation currencies will be short-lived as rising wages make their exports less competitive, said Morgan Stanley’s Rahman. Adjusted for inflation, emerging-market currencies are 6 percent above levels prior to the 2008 global banking crisis, he estimates.
“Emerging markets are graduating in terms of their income-per-capita profile,” said Rahman. “Growth is slowing as the result of that because there’s less catching-up to do.”
Rahman said he favors currencies of nations that are pushing through reforms to improve productivity, such as Mexico, Russia and India.
Mexico’s peso has strengthened 5.9 percent this year, the most among 31 major currencies, as President Enrique Pena Nieto carries out reforms in the energy and telecommunications markets to foster investment and growth.
From 2003 to 2007, 22 of 25 emerging-market currencies rallied, with the real, won, forint and Philippine peso gaining at least 20 percent against the dollar as U.S. and Europe consumers bought their cheaper shoes, textiles and toys. Since then, only nine emerging currencies advanced against the greenback, data compiled by Bloomberg show.
“When the world was imbalanced, emerging markets fed into the imbalance and benefited from it,” said UBS’s Baweja. “As the world rebalances, the emerging market is in a bad place. There isn’t a plan B yet. It’s not surprising emerging-market currencies are not performing.”