Traders Crying Over Losses Missing HSBC’s BargainsRobert Brand and Joseph Ciolli
HSBC Holdings Plc, which gets more than half of its revenue from emerging markets, says it’s time to start buying their currencies after a selloff pushed exchange rates to their lowest levels since 2009.
“When others are crying, you should be buying,” David Bloom, HSBC’s London-based head of global currency strategy, said in a Feb. 6 interview in Cape Town. “This is not the time to be bearish. The time to be bearish was a year ago. If you’ve missed that, you’ve missed the boat.”
Bloom, whose bank started life in the 1800s financing Britain’s East Asia trade in opium, silk and tea, is setting himself up as a contrarian in a sea of pessimists. Firms from Deutsche Bank AG, the biggest foreign-exchange trader, to Goldman Sachs Group Inc. are cautious, saying emerging currencies remain vulnerable.
Bears argue that widening current-account deficits and falling reserves make many developing nations too dependent on foreign capital, both factors that Standard & Poor’s cited when it lowered the outlook on Turkey’s credit rating to “negative” from “stable” on Feb. 7. Bloom disagrees, saying interest-rate increases by countries from India to South Africa and a drop in volatility make their currencies a safe, high-yielding bet.
“Those interest rates are going to look juicy,” Bloom said. “As soon as volatility goes down, the carry starts looking attractive,” he said, referring to a strategy of borrowing in currencies where rates are low and using the proceeds to buy those with higher yields.
Bloom predicts South Africa’s rand will erase this year’s 5.9 percent loss and rally to 10.4 per dollar by the end of 2014, from 11.1454 at 12:46 p.m. in New York. Turkey’s lira, which fell to a record 2.39 to the dollar on Jan. 27, will rebound to 2.1 by year-end, he said.
In both cases, Bloom is more bullish than the median forecasts in Bloomberg strategist surveys, which see the rand ending the year at 10.7 and the lira at 2.25 per dollar.
A Bloomberg index tracking 20 emerging-market exchange rates climbed 0.8 percent last week, after falling 5.4 percent from October through the end of January. That’s the worst three-month performance since early 2012 and pushed the measure on Feb. 3 to the lowest level since April 2009. The index declined for the first time in five days today, dropping 0.2 percent.
The rout was sparked by events ranging from the U.S. Federal Reserve’s decision to start pulling back on its stimulus measures to a slowdown in Chinese manufacturing and Argentina’s move to devalue its peso. Turkey and South Africa sought to stem a run on their currencies by raising interest rates.
“We remain cautious on emerging-market foreign exchange after an intensely volatile start to the year,” Kevin Hebner, a strategist at JPMorgan Chase & Co. in London, wrote in a Feb. 7 report, lowering the firm’s forecasts for several currencies.
The New York-based bank cut its year-end prediction on the lira to 2.2 per dollar, from 2.15, and estimated the rand would weaken to 11.15, compared with a previous forecast of 10.7.
JPMorgan reduced its year-end call on Mexico’s peso, which traded at 13.28 per dollar at the end of last week, to 12.8 from 12.4. That makes it more bearish than the 12.71 median estimate of 30 analysts surveyed by Bloomberg. HSBC sees it at 12.6.
Bloom expressed concern about emerging markets back in October, telling Bloomberg Television that balance-of-payments deficits would cause problems for some developing nations, and calling the picture “quite mixed.” Bloomberg’s currencies index started its slide at the end of that month.
He hasn’t always been right. Bloom said in another interview in October that he was “upbeat” about the rand’s prospects and predicted an end to its decline. Instead of rallying, South Africa’s currency went on to weaken another 5 percent by the end of the year.
HSBC isn’t alone in now detecting a rebound in developing-nation currencies.
Renaissance Capital Holdings Ltd., a London-based investor and investment bank that specializes in emerging markets, is also more bullish than most. While currencies may extend declines in the short term, the sell-off “looks largely done,” Charles Robertson, the firm’s chief economist, said in a Feb. 6 note to clients.
“Buying the rand or lira now carries the risk of a birching from your risk department if currencies do plunge, but it would obviously provide the cheapest entry points,” Robertson said. He sees the lira climbing to 2.03 per dollar by the end of the year and the rand “slightly stronger” than 10 by next January.
Turkey’s central bank increased its benchmark rates to as high as 12 percent at an emergency meeting a day after the lira reached its all-time low last month, prompting a rally of 5 percent.
The rand has climbed 2 percent from a more than five-year low of 11.3909 per dollar on Jan. 30, as policy makers unexpectedly raised rates by a half-percentage point to 5.5 percent on Jan. 29. India’s rupee is up about 1 percent since central bank Governor Raghuram Rajan surprised markets by lifting the main rate a quarter-point to 8 percent Jan. 28.
Policy makers’ actions have helped calm markets, reducing currency volatility and boosting confidence in carry trades, according to HSBC’s Bloom.
JPMorgan’s Emerging Market Volatility Index ended last week at 9.36 percent, down from a four-month high based on closing prices of 10.35 percent on Jan. 29.
The rate increases reverse the trend of the past five years, when the Fed’s stimulus boosted investment around the world and allowed central banks to cut borrowing costs. Cheap money in developing economies encouraged consumption and widened trade deficits, which are coming back to haunt the countries now that investors’ money is flowing out.
“We would await not only confirming foreign-exchange market price action, but also confirming economic evidence, before becoming more confident on sustained emerging-currency gains,” Nick Bennenbroek, the head of currency strategy at Wells Fargo Securities LLC in New York, wrote in a Feb. 7 note.
Goldman Sachs says currencies of developing nations with large trade shortfalls and a lack of reserves will find it difficult to share in a recovery.
“In ordinary times, emerging markets can easily finance current-account deficits and roll over externally held debt as it becomes due,” Robin Brooks, a senior strategist at the bank in New York, wrote in a Jan. 31 note. “However, at times of financial markets distress, it can become harder for EM countries to do this. This underscores the vulnerability of Turkey and South Africa.”
The two countries’ external financing needs exceed their foreign-exchange reserve balances by 19.3 percent and 4.5 percent of gross domestic product, according to Goldman Sachs. Those are the highest ratios of 14 developing economies tracked by the firm, and compare with an average of minus 8.2 percent.
S&P said it cut the outlook on Turkey’s BB+ rating because of “rising risks of a hard economic landing.” The credit assessor cited the nation’s “declining reserve coverage of net external financing” and a current-account deficit which, when added to external debt, will widen to an estimated 25 percent of GDP this year.
“It’s too soon for bottom-fishing,” Henrik Gullberg, a strategist in London at Deutsche Bank, said in a Feb. 7 report. “However, we do believe in continued differentiation in EM FX going forward, with valuation, balance-of-payments vulnerabilities as well as the quality of policy making increasingly reflected in performance.”