Supported by robust fundamentals and a softer dollar
Solid growth prospects and sound policy management are benefiting emerging currencies.
Gradual Fed tightening will keep the dollar soft, helping the whole emerging currency spectrum.
A full-blown trade war would leave currencies from export-oriented economies in difficulty.
"Attractive valuations, a soft dollar and robust growth will underpin emerging currencies."
Emerging currencies – looking for growth. Solid growth momentum and improving fundamentals will help emerging currencies perform well in 2018 and beyond. Of course, trade tensions may take their toll as many countries in Asia are highly leveraged to global trade. However, we would expect more talk than action in the run-up to the US mid-term elections.
Although we are not overly bullish on commodity prices, the ongoing global recovery should underpin commodity-related currencies as the global rise in capital expenditure will translate into robust demand for natural resources and raw materials.
Emerging market bonds and equities attracted substantial capital inflows in 2017. Although markets are set to be choppier in 2018, we still expect positive capital inflows into emerging assets. On average, equity valuations look more compelling than in developed markets and bond yields remain more attractive.
The main risk for emerging currencies would be a surge in US long-term yields driven by major inflation surprises in the US. This is not our base-case scenario as long as Fed tightening remains gradual and the US yield curve stays flat.
Overall, the stage is set for renewed dollar weakness once the impact of US tax cuts has been priced in – in this context, we would expect emerging currencies to do well.
Sources: SGPB, Datastream, 30/11/2017. * The EM-8 Carry Trade Index measures the cumulative total return of a strategy by which a long-term investor buys a basket of eight emerging market currencies (Brazilian real, Mexican peso, Indian rupee, Indonesian rupiah, South African rand, Turkish lira, Hungarian forint and Polish zloty) versus the US dollar.
Past performance should not be seen as an indication of future performance. Investments may be subject to market fluctuations, and the price and value of investments and the income derived from them can go down as well as up. Your capital may be at risk and you may not get back the amount you invest.