The emerging-market selloff that’s counting Indonesia and India among its biggest casualties will be temporary — a return to a weak dollar will revive investor appetite for the nations’ assets.
That’s the view of JPMorgan Asset Management, which sees investors piling back into the two countries’ bonds and currencies as the greenback’s strength begins to wane.
“In Indonesia or India, the selloff is really reacting to Treasury yields and the dollar,” Tai Hui, chief market strategist for Asia Pacific, said in a telephone interview from Hong Kong. “When that starts to stabilise, investors will go back to these markets.”
Higher US yields and a resurgent greenback mean that countries with bigger current account deficits such as Indonesia and India are “at the forefront of taking the hits,” according to Hui. This could be creating an opportunity to buy.
“We’re very much in a dollar down cycle in the next one to two years in my view, which means that EM should perform reasonably well,” he said.
Investors began souring on emerging-market bonds and stocks last month, dumping currencies and selling securities from Indonesia to Argentina. Developing nations’ local-currency bonds have lost 5.2 per cent this quarter, compared with a 1.6 per cent decline for US Treasuries, data compiled by Bloomberg show.
Emerging-market currencies had the biggest slump in a year on Tuesday.
“The interest or coupon you receive from Asia EM is a big buffer against higher Treasury yields,” said Hui. “Local currency EM debt may still be a bit volatile but you’re likely to get upside from the local currency front.”
The slump in the Indian rupee and Indonesian rupiah to multi-month lows is spurring renewed intervention by authorities as their high yields fail to shield them from broader emerging-market capital outflows. State-run Indian banks sold dollars on Wednesday, probably on behalf of the central bank, and Bank Indonesia raised its benchmark interest rate on Thursday — the first time since 2014.
“I think this is a temporary phenomenon,” Hui said of the sell-off. “If Indonesia or India or some of the other emerging-market currencies are weak on the back of their current-account positions, then I’d argue the same for the U. S. dollar in the longer term.”
Here are more of Hui’s investment views:
- Likes North Asian currencies including the Korean won and Chinese yuan; also has a positive view on the Singapore dollar
- These countries have “strong FX reserve positions” and are “typically a lot more resilient” in current environment
- Sees Asia in a better position than Latin America or some central European emerging markets
- Sees 10 year US Treasury yield drifting between 3 to 3.5 per cent level by year’s end
- As long as yields rise gradually, “emerging markets should hold up well”