The U.S. Federal Reserve’s tightening last year had a significant impact on emerging economies.
“Last year, as people worried about the Fed tightening liquidity, a number of [emerging] currencies and economies started to slow dramatically,” said Michael Reynal, chief investment officer and portfolio manager at Sophus Capital in Des Moines, Iowa, in an April 12 interview.
The Argentine peso fell by 50% in 2018, Reynal said, and it wasn’t alone. The Turkish lira fell by 28%, the Russian ruble by 17%, the Brazilian real by 14% and the South African rand by 13.5%.
“These are all indicators of countries struggling with debt, and whose currencies had to suffer to help rebalance their capital and current accounts,” said Reynal, whose firm sub-advises the Renaissance Emerging Markets Fund.
So what does the Fed’s current pause mean for emerging markets?
“Once those currencies devalue, however, competitiveness kicks in. In other words, the Argentine cost is 50% below what it was before the devaluation.”
In the current “calmer environment,” he said countries that have suffered devaluation have limited downside and a more positive outlook.
“For 2019, we’re looking more favourably at South Africa and Brazil, for example,” said Reynal.
The South African rand has fluctuated from US$0.081 a year ago to US$0.070 this month. Further, annual inflation in South Africa has been on the rise this year, increasing to 4.5% in March, though it remains below its November 2018 peak of 5.2%.
In Brazil, one real has fluctuated between US$0.28 a year ago and US$0.25 this month. Meanwhile, inflation increased to 4.94% inApril, up from 3.89% in February. CPI was also up to 4.7%, which is 0.8% higher than February.
Reynal is also positive on Russia. The country remains one of the largest global oil exporters, he explained. And after dipping at the end of 2018, the price of oil has rallied this year.
West Texas Intermediate went from US$45.41 per barrel on Dec. 31, 2018 to US$66.30 on April 23, before dropping slightly in recent weeks.
Also, Reynal said the Russian government is stable, and the ruble is cheap and competitive. A year ago, the ruble cost US$0.016. And while it’s seen minor fluctuations, it was at US$0.015 this month.
Reynal is “still worried about Turkey from a political perspective, [but] we’re less worried than we were previously from an economic and capital perspective.”
The Turkish lira is trading at a discount today: US$0.16 compared to the US$0.24 rate a year ago. Meanwhile, Turkey’s annual inflation rate was 19.5% in April, declining since it surpassed 25% in September.
Finally, Reynal remains concerned about the political situation in Argentina, with an election in October. “We’re staying clear for now. But we know the Argentine market is extremely cheap, and we’re looking for signals for stabilization at the political level.”
The Argentine peso has continued to decline. It’s trading at $US0.022, compared to US$0.044 a year ago. Further, the inflation rate continues to climb. In April 2018, inflation was 25.6%. As of March 2019, it hit 54.7%.
Overall, Reynal said, the Fed’s “potential loosening, or more stable outlook in 2019 and 2020” means he’s looking at some of these “riskier markets” with more interest.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.