Emerging-Market Crisis Talk Vanishes as Currencies RallyYe Xie and Kyoungwha Kim
The emerging-market currencies rout that had sparked comparisons to the 1997 Asian financial crisis is becoming little more than a fading memory.
The Bloomberg index of 20 developing-nation currencies has erased this year’s losses, rebounding from a five-year low reached in February, as Indonesia’s rupiah, Turkey’s lira and Brazil’s real surged. Capital is starting to flow back into emerging markets, with exchange-traded funds attracting $1.4 billion in the first three days of April, as countries take steps to stabilize their economies, according to data compiled by Bloomberg.
“The worst is over,” Kieran Curtis, an emerging-market debt manager at Standard Life Investments in London, which oversees $271 billion, said by phone on April 2. “The emerging-market story is less bad. We’re more comfortable holding emerging-market currencies.”
Just a couple of months ago, the selloff prompted banks from Morgan Stanley to UBS AG to draw parallels with the 1990s crisis, when the Thai baht lost half its value in six months and South Koreans lined up in the streets to donate gold jewelry to the government. Policy makers have worked to quell investor concerns since January, with South Africa and Brazil raising interest rates and India and Indonesia cutting their trade deficits.
Bloomberg’s currencies index tumbled 3 percent in January, its worst start to a year since 2009, as South Africa’s rand and the lira plunged. By April 1, it had erased this year’s losses, climbing to 92.1 from a low of 88.9 on Feb. 3. The rally has been broad-based, with 21 of 24 emerging-market currencies tracked by Bloomberg gaining since January. China’s yuan, Russia’s ruble and the Chilean peso were the losers.
“I am turning increasingly bullish on EM assets,” Benoit Anne, the head of emerging-market strategy at Societe Generale SA in London, said April 2 by e-mail. He recommends buying the lira, rupiah, India’s rupee and Hungary’s forint. Describing a shift in sentiment from “doom to bloom,” he said “we’re definitely getting closer to the bloom phase.”
The doom stage lasted throughout January.
Argentina carried out the biggest devaluation of the peso since 2002 that month, prompting a plunge to a record 8.2435 per dollar. Turkish Prime Minister Recep Tayyip Erdogan’s cabinet became embroiled in a corruption scandal that helped send the lira to an all-time low of 2.39 to the greenback.
In Ukraine, anti-government protests led to the government imposing capital controls, two months before Russia’s incursion into the Crimea region unnerved investors across emerging markets. At the same time, the U.S. Federal Reserve started to pare its unprecedented stimulus program, a move that would support the dollar, while a slowdown in Chinese manufacturing deepened.
Morgan Stanley, which correctly predicted the start of the currency rout last year, said at the height of the selloff that it risked a “sudden stop” of capital inflows similar to Asia a decade and a half ago. UBS said at the time that Turkey’s fundamentals weren’t “significantly better” than Thailand’s in 1997.
Morgan Stanley and UBS aren’t convinced the rout is over.
While improved sentiment is justified for now, an increase in U.S. interest rates will squeeze developing nations by making their assets less attractive, Manoj Pradhan, a London-based economist at Morgan Stanley, wrote in a March 31 report.
Inflation-adjusted yields in many of the countries are still too low to keep luring capital, Bhanu Baweja, the head of emerging-market cross-asset strategy at UBS in London, said by phone on April 2. While he recommends clients “take profit” on a bet for the lira to fall, he said he’s maintaining calls for the forint, rand and ruble to weaken.
Traders are reducing their short positions, or bets that an asset will drop, on many emerging-market currencies.
Foreigners cut net short wagers on the Brazilian real to $21.6 billion on April 2 from a record $28.1 billion on Jan. 23, according to data from Sao Paulo-based BM&FBovespa, South America’s largest exchange. Overseas investors in the Chilean peso forwards market reduced their net short positions to $13.3 billion on April 1 from an all-time high of $15.8 billion on March 6, central bank data show.
Among 1,989 ETFs tracked by Bloomberg, two emerging-market funds have attracted the most money this month after the SPDR S&P 500 ETF Trust, which follows the U.S. stock benchmark.
The $33 billion iShares MSCI Emerging Markets ETF, which invests in stocks, has added $947 million this month, reducing its withdrawals this year to $6.5 billion. The $4.2 billion iShares JPMorgan Emerging Markets Bond ETF, which invests in debt, has attracted $409 million in April and $629 million this year, according to data compiled by Bloomberg.
The rebound was in part triggered by policy makers’ efforts to stem dollar outflows.
Indonesia cut the deficit in its current account, the broadest measure of trade, to the equivalent of 1.98 percent of gross domestic product in the fourth quarter, from the previous period’s 3.8 percent. India’s government predicts its shortfall will be less than half last year’s $88 billion.
The rupiah has advanced 7.7 percent in 2014, paring last year’s 21 percent loss, and reached a five-month high of 11,254 per dollar on March 17. India’s rupee has risen 2.8 percent this year after sliding 11 percent in 2013.
Turkish policy makers lifted their benchmark interest rate to 10 percent from 4.5 percent at a Jan. 28 emergency meeting, making the lira more expensive to short and prompting a 6.3 percent rally. Brazil raised its target rate a quarter-point to 11 percent last week. India has also unexpectedly increased borrowing costs while Indonesia has been boosting its reference rate at the fastest pace since 2005.
“In our eyes, we are only at the beginning of the carry cycle,” David Bloom, the global head of currency strategy at HSBC Holdings Plc in London, wrote in an April 2 note, referring to the practice of buying emerging-market assets for their relatively high interest rates.