Emerging Currency Markets

5 Emerging Markets Currencies to Consider in 2016
By Anthony Jerdine| March 13, 2016

The currencies of the world’s leading emerging economies have been in a tailspin for years. The Chinese renminbi, Indian rupee, Russian ruble and Brazilian real each declined by more than 20% between 2012 and 2015. This is one of the reasons why the U.S. dollar experienced a resurgence in global markets despite the Federal Reserve’s massive quantitative easing programs.

Another result of the Fed’s easy money policy was ultra-low interest rates between 2007 and 2015. Income investors looked away from traditional savings vehicles, such as Treasury bonds and certificates of deposit (CDs), in favor of stocks and high-yield bonds.

There was a time when emerging market debt was considered an attractive investment. Bonds in Indonesia, Brazil and Russia were once considered winners thanks to high nominal returns, but the catastrophic inflation in these countries transformed their bonds into big-time losers. The situation was even worse in Argentina, which is now shut out of bond markets, and Venezuela.

What Makes a Currency Appreciate?
Currencies trade in relative prices in international markets because the world theoretically operates through a floating exchange-rate regime. If the U.S. dollar loses 2% of its purchasing power while the Russian ruble loses 5% of its purchasing power, then the dollar is supposed to appreciate, or strengthen, against the ruble. American investors should try to find emerging market currencies that are not going to lose as much purchasing power as the dollar in 2016.

There are two ways a currency becomes more valuable. The first is a reduction in the currency’s circulation. If fewer yuan are floating around the international system, that means each remaining yuan becomes that much more valuable as the supply shrinks. The second is an increase in the home economy’s labor productivity. For example, Russia is an oil-rich nation, and the ruble should become relatively more valuable if Russian oil exporters become more productive.

Strong currencies raise incomes, help bondholders and make it easier to afford foreign goods. On the other hand, a rising currency means it is probably more difficult to pay off debt or sell in foreign markets. Hold currencies, or assets denominated in currencies, will hold the most value in the long term.

1. Poland: The Złoty
Poland’s economy entered 2016 with as much momentum as any other European nation, with the last quarter expected to be the most robust in nearly five years. The country’s labor market is strong and business confidence is rising. The combination of low inflation, impressive domestic demand and increasing productivity has led to an expectation that the Polish złoty will rise throughout 2016.

2. South Korea: The Won
South Korea has one of the most fundamentally sound and productive economies in the Asia-Pacific region. The Korean won lost nearly 15% against the U.S. dollar since its peak in early 2014. Low debt-to-GDP figures for the South Korean government should alleviate pressures to print lots of new money.

3. Hungary: The Forint
Hungary currently has low interest rate problems, and there are many underlying economic concerns. The Hungarian forint has performed admirably in forex markets since mid-2012 and could experience inflows from investors running from India and Russia.

4. Indonesia: The Rupiah
The Indonesian rupiah is a momentum play and not backed by serious fundamentals, or at least not compared to the forint, won or złoty. It was trading at record lows against the dollar before rebounding significantly at the end of the year. This is a currency to keep an eye on, especially if commodity prices rebound.

5. India: The Rupee
The rupee is a riskier bet than other emerging market currencies because of India’s problems with inflation and uncertain monetary policy. The Indian government is torn between fighting high prices and trying to devalue to promote Keynesian-style growth programs. However, the rupee outperformed virtually every other emerging market currency on a risk-adjusted basis in 2015 due to its high interest rates. The rupee offers a 7.5% deposit rate for 2016.

5 Emerging Markets Currencies to Consider in 2016

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