Vanguard Group sees opportunity for EM currencies as dollar extends rise

A potential extension of the dollar’s gains against emerging-market currencies in the next few months presents long-term investment opportunities in India, Indonesia and Mexico, according to Vanguard Group Inc.

Emerging Asia is the most attractive region with the biggest returns seen in India and Indonesia, said Jonathan Lemco, a senior investment strategist based in Malvern, Pennsylvania. Within Latin America, “Mexico may be the number one investor darling in the world right now since the new Nafta deal was signed and the market is less worried about its president-elect," he said.

Investors should raise their long-term exposure to emerging markets, Lemco said. The dollar will be buoyed for the rest of this year by a strong US economy, healthy corporate earnings and Federal Reserve policy tightening, he added. Vanguard actively manages more than $1 trillion of its $5.1 trillion assets.

The rupee and Indonesia’s rupiah are the worst currencies in Asia this year, weighed by concerns over fiscal deficits and inflation. Both have slumped more than 10 per  cent as foreign investors fled their stock and bond markets amid soaring US yields. The Mexican peso is the only emerging-market currency to gain in 2018, having rebounded from a 1-1/2 year low in June. 

Lemco said India’s economic growth forecasts are strong and policy reforms have been adequately implemented.

"Fiscal management is not great, but better than it used to be and the central bank is good. 

There isn’t much sovereign debt from India, so there is a scarcity issue, but overall it remains an investor darling,” the strategist said.

Indonesia offers attractive interest-rate spreads, backed by strong political management and a sound central bank despite the recent cut in growth outlook, he said. Mexico is attractive as investors are increasingly confident about incoming President Andres Manuel Lopez Obrador.

Bloomberg