Strategy

Local monetary authorities’ intervention bodes well for EM currencies - Standish

Alexander Kozhemiakin, Standish, October 2, 2011

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Emerging market central banks are starting to take steps to support their currencies, and emerging market local currency-denominated bonds remain an attractive investment proposition, according to Alexander Kozhemiakin, head of emerging markets debt at BNY Mellon’s fixed income specialist Standish. Here he explains why local currency-denominated emerging market bonds remain an appropriate choice for those investors seeking exposure to risk assets.

A lot of people were surprised by the vehemence of the sell-off in
emerging market currencies in September, but we have always argued that, when
conditions deteriorate very sharply, there will be no ‘decoupling’ between
emerging and developed markets. Emerging market currencies
were outperforming strongly through the end of August, but as the global
economic crisis continued to unfold, these currencies also started to crumble.

The near-term direction of markets is entirely at the mercy of the
global sentiment and, in particular, the adequacy of the policy response to the
European sovereign debt crisis. In addition, as we also know
from past experience, emerging market currencies can ‘overshoot’. However, we
are encouraged to see that after a very rapid sell-off, emerging market central
banks are starting to take steps to support their currencies. For example, in a
reversal of a 26-month old policy, the Brazilian authorities intervened in late
September, selling $2.75 billion of currency swaps in a move to support the
real. 

Meanwhile, the Indonesian authorities sought to bolster the rupiah by
purchasing long-dated bonds. Elsewhere, Russia announced that it had no plans
to revise (higher) the rouble trading band, while indications are that the
Mexican monetary authorities will intervene ‘verbally’ in support of its
currency.

While the deceleration of global economic activity is clearly not
positive for emerging market currencies, the more compelling currency
valuations, the change in stance by local monetary authorities, and the fact
that the ‘growth differential’ story of emerging markets is still intact,
reinforce our argument that, for investors seeking exposure to riskier assets,
emerging market local currency-denominated bonds remain an attractive
proposition.

Headquartered in Boston, USA, Standish is a specialist
active fixed income manager investing in global fixed income markets and across
the full credit spectrum.

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