|
 Throughout the summer, while U.S. equities held relatively steady,
riskier foreign markets were crushed, and their currencies battered
by talk of a Fed pullback.
Now, many investors are convinced the Fed's tapering won't cause
that kind of market volatility again, and U.S. rates won't spike,
just rise slowly. If that's the case, investors will be emboldened
to move back into emerging currencies.
The Fed cuts started this week when it reduced its monthly
bond-buying to $75 billion from $85 billion. A reduction in the
Fed's quantitative easing is supposed to benefit the greenback
because it would raise U.S. rates, making those assets more
attractive. It also curbs the supply of cash that tends to flow into
riskier assets such as emerging market economies.
Some emerging market debt and currencies have become more attractive
over the last six months, fund managers said, and the Fed's decision
has not diminished their allure.
"Once the cat (Fed tapering) is out of the bag and the outcome
should be much lower volatility than what we saw in the past, market
participants will likely return to the emerging market world by
buying the more solid fundamental names with attractive valuations
and higher interest rates," said Thomas Kressin, senior vice
president and head of European foreign exchange at global bond fund
PIMCO in Munich, Germany.
Traders don't expect the Fed to hike interest rates earlier than
July 2015.
When the Fed previously suggested it might start winding down its
stimulus, some emerging market debt and currencies tumbled. The
Indian rupee, for instance, has lost 11 percent this year.
"There has been significant underperformance in emerging market
debt, not only in May and June, but also recently when rates have
risen as well," said Mike Swell, co-head of global lead portfolio
management, at Goldman Sachs Asset Management in New York, which
manages more than $349 billion in fixed income, currency and
commodity assets.
On the other hand, the Mexican peso has proven more resilient,
falling just 1.1 percent in 2013, along with the South Korean won,
which actually gained 0.2 percent.
Pimco's Kressin, for one, thinks a long Mexican peso and short U.S.
dollar trade is one of the more intriguing bets for 2014. With the
U.S. outlook improving, Mexico is expected to benefit because of its
strong trade relationship with the world's largest economy.
One-year volatility on the Mexican peso has dropped to 12.1 percent
on Friday from highs of 15.02 percent in early September. The
Mexican peso's volatility has become a barometer of risk for
emerging market currencies because of the breadth of that market.
[to top of second column] |
PRESSURE FOR SOME EMERGING MARKETS
Countries that have to import capital to finance domestic spending
such as South Africa and India could see their exchange rates
suffer, while those with surpluses such as Mexico won't feel as much
of a pinch.
In Mexico's case, not only do investors think its economy is
fundamentally sound, its assets have higher returns as well.
Mexico's 10-year government bonds yield 6.33 percent, compared to
the U.S. ten-year note of 2.92 percent.
The Mexican peso, meanwhile, is 5 percent undervalued against the
dollar, according to Commerzbank researchers.
From a developed market-perspective, Mexico can give you stable
returns, without having to incur a lot of risk, said Mario Robles,
director and head of Latin American research at Commerzbank in New
York.
Swell said Goldman has added emerging market debt — both local
currency as well as in dollar, with an emphasis on Latin America.
"Latin America has underperformed both from a rate perspective and
currency perspective."
Some fund managers have cited Brazil's currency and debt as value
plays in the midst of the Fed's tapering. The Brazilian real has
fallen nearly 14 percent this year, and some fund managers think it
will stabilize in 2014.
The U.S. dollar is currently trading at 2.36 reals, and Standish
Asset Management thinks despite the tapering, the greenback will be
contained within the 2.20-2.40 trading band.
"We think the Brazilian real is fairly valued," said Federico Garcia
Zamora, director of currency strategies and senior portfolio manager
at Standish Asset Management in Boston, which oversees assets of
about $163 billion.
He noted Brazil's returns of between 10-12 percent on short-term
bonds with maturities ranging from one to three years. This allows
investors borrowing in lower-yielding currencies more "carry trade
cushion," and the selloff in the real makes it a more attractive
time to put on such trades.
"The combination of the two has made us more comfortable in the
emerging market space," he said.
(Editing by David Gaffen and Andrew Hay)
[© 2013 Thomson Reuters. All rights
reserved.] Copyright 2013 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
