The emerging-market currencies rout that had sparked comparisons to the 1997 Asian financial crisis is becoming little more than a fading memory.
Bloomberg’s index of 20 currencies in developing nations 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 US$1.4 billion in the first three days of this month, 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 US$271 billion, said by phone on Wednesday last week.
“The emerging-market story is less bad. We’re more comfortable holding emerging-market currencies,” Curtis added.
Just a couple of months ago, the sell-off 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.
Policymakers 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 Tuesday last week, 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 last week 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 US 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 nation’s government imposing capital controls, two months before Russia’s incursion into its Crimea region unnerved investors across emerging markets. At the same time, the US Federal Reserve started to pare its unprecedented stimulus program, a move that would support the US 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 sell-off 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 were not “significantly better” than Thailand’s in 1997.
Morgan Stanley and UBS are not convinced the rout is over.
While improved sentiment is justified for now, an increase in US interest rates will squeeze developing nations by making their assets less attractive, Manoj Pradhan, a London-based economist at Morgan Stanley, wrote in a report on Monday last week.