Emerging Market Crisis Series: Major Shift in Gear

Emerging Market Crisis Series: Major Shift in Gear

1 April 2016, 09:22
Roberto Jacobs

Emerging Market Crisis Series: Major Shift in Gear

After suffering since 2013 and more so at the start of the year, emerging market currencies had their best month since at least 1998 according to Bloomberg’s calculations. Two days back, Bloomberg dig up an article and the chart shown here that 20 emerging market currencies that it tracks gained about 5.5% in March, which is best in 17 years.

Here is the link to Bloomberg’s article - http://www.bloomberg.com/news/articles/2016-03-30/emerging-markets-rally-gathers-pace-as-fed-stirs-inflow-support

One of the key factors Bloomberg associated with the rise is weakness in Dollar, due to lowering of rate hike expectations.

So we dug up individual data for currencies and compared them in a span of five year, see currency comparison chart.

The chart clearly shows over a five year span, (USD started appreciating in 2011) emerging market currencies are pretty weak.

Indian Rupee is about 48% weaker, Indonesian Rupiah about 52% and currencies like Brazilian Real, South African Rand weaker by more than 120%.

So, emerging market assets in Dollar terms are pretty weak and offer enviable yield.

So has the crisis in emerging markets bottomed?

Probably not for countries like Brazil or South Africa, facing political uncertainties but situation has improved substantially in economies like India, Indonesia. Credit risk for these countries are now much lower, moreover they benefit from lower energy and commodity prices.

However, lower commodity prices don’t benefit everyone, like Russia and Malaysia, whose currencies are still down 137% and 29% respectively against Dollar. But recent rallies in commodities have befitted them largely.

But something may be working beyond, commodities prices, improved current account, and weakness in Dollar or portfolio flows.

Yes, there is now a shift in business that is happening.

Let’s take an example.

Depreciation of currencies have made lot of emerging market countries, so attractive, that they are becoming a new way of cutting the cost, even if infrastructure gets degrade a bit. Biggest names in this sections are from energy and commodities space, which has been hit big time in past year.

Checkout this - http://www.upstreamonline.com/live/1409711/mcdermott-to-close-singapore-office?show_full_site=true

McDermott International has decided to shift its head office from Singapore to Kuala Lumpur, Malaysia. The cost cutting opportunity is so attractive, a little downgrade in infrastructure doesn’t matter.

It is probably a good time to reconsider those EM shorts and think off going long in selective sectors in selective countries.

The material has been provided by InstaForex Company - www.instaforex.com

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