Templeton Says Emerging-Currency Rally Is Just Getting Started

  • Twenty of 24 developing-nation currencies up this year
  • Recent outflows suggest investor fears of seasonality, Trump

Assets from the developing world are starting 2017 on a hot streak the likes of which have been seen just three times this century, and may be on pace to keep strengthening.

Twenty of 24 emerging-market currencies have appreciated so far this year, led by rallies of more than 9 percent in Mexico’s peso and Poland’s zloty. Of the four that have slipped, none are down more than 1 percent.

Collectively, currencies from developing nations have gained 4.9 percent in 2017, the best start to a year since 2006, during George W. Bush’s presidency. They’re due for more gains given cheap valuations, a return of foreign investors and the developing world’s reduced dependence on commodities, according to Michael Hasenstab, who manages the $40 billion Templeton Global Bond Fund and is especially optimistic about India, Mexico and Brazil.

“We’ve seen some nice tailwinds develop across emerging markets this year as foreign investment has returned to a number of undervalued markets,” Hasenstab wrote in an email. “We are still in the early stages of foreign capital returning, and there’s still a lot of room to strengthen given how far valuations dropped in prior years.”

This year’s near-record start rivals big gains at the beginning of 2003, 2006 and 2011. The rallies in 2003 and 2006 book-ended a four-year bull market for emerging-market assets prior to the global financial crisis. In 2011, more than two years after Lehman Brothers’s collapse, the currencies jumped again on strong growth prospects, but the gains petered out halfway through the year.

Some traders have found this year’s quick start unsettling. Hedge funds and real money investors pulled money from emerging-market currencies last week, according to Citigroup Inc., which cites seasonality as one potential factor. And analyst forecasts compiled by Bloomberg show strategists expect 21 of the 24 currencies to depreciate by year-end.

One key factor for the outlook is the trajectory of the dollar, and whether policy makers in the U.S. will want to keep it from appreciating to support exporters, according to Greg Saichin, the chief investment officer for emerging-market bonds at Allianz Global Investors in London, which has $511 billion under management.

“The overall tone appears to be steady for the medium term," Saichin said. “The big question mark is USD strength.”

Other strategists are focused on the improving economic outlook for developing countries.

"Emerging-market currencies can still do well," said Lucy Qiu, a New York-based analyst at UBS Wealth Management, which oversees more than $1 trillion and recommends the Brazilian real, Mexican peso and Indonesian rupiah. "Domestic growth data remains solid and externally, we expect the U.S. dollar has likely peaked."

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