About 20 of the 24 emerging-market currencies have noted a rise this year, led by rallies of more than 9% in Mexico’s peso and Poland’s zloty. Moreover, none of the four that have slipped are down more than 1%.
“Emerging-market currencies are due for more gains given cheap valuations, a return of foreign investors and reduced dependence on commodities,” Franklin Templeton manager Michael Hasenstab says.
Developing world currencies 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.
Overall, currencies from developing nations have gained 4.9% 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 USD 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.
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.
“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.”, Hasenstab further adds.
Brokers 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.
The trajectory of the dollar is one of the key factors. It is also uncertain whether policy makers in the US 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 USD 511 billion under management.
“The overall tone appears to be steady for the medium-term,” Saichin said. “The big question mark is USD strength.”