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WHARD Stewart Ali Chughtai

Emerging market currencies face short term correction against long term growth

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Ali Chughtai, portfolio manager at USD235 million European macro manager WHARD Stewart, believes that the short term has a real possibility of seeing a correction in emerging market (EM) currencies.

“We have had a reasonable rally in emerging markets and their currencies that arguably started at the beginning of 2016, once the market became comfortable that the worst was possibly over for China,” Chughtai says.

The Chinese stabilisation provided a kind of a catalyst for emerging markets, he says and this rally is now getting mature. “It’s not necessarily due for an end to the rally or the trend, but it would be reasonable to assume given the extent that we will perhaps have a correction unfolding in the next three to four months before the year end. That would be a reasonable expectation.”

Catalysts for change are, he says, difficult to identify but there are quite a few candidates, with the US Federal Reserve leading the field with its rate setting committee which has many vacancies, including from next year, the top job of chair.

The market globally has been very benign on the outlook for inflation with barely one Federal Reserve hike priced in between March of next year and March 2019. “The market is expecting there to be little central bank activity which is aiding the bullish sentiment in emerging markets,” Chugdal says.

General liquid emerging markets are at or near their highs for this cycle at the moment and another driver which has aided this is a weak dollar which has prevailed for the majority of 2017.

“A correction in the dollar and/or in the US equity markets could result in an appreciable move in emerging market currencies given that they have rallied for two years without disturbing the long term trend,” he says.

However, the long term bull case for emerging markets is quite solid, he believes. “The near term correction that may happen aside, there is nothing wrong with long term emerging market value. The demographics and growth is good and most have integrated into the global economy and will continue to grow better than core markets. Over the long term, the case is there and there is nothing wrong with it.

“For those interested in the short to medium term then a correction like this is worth navigating but if you are in it for the longer term over the next five, six or seven years, then it’s less sensitive.”
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“Emerging markets bring a little bit of diversification, a source of growth that has better long term potential demographics and that is one of the most important driving factors,” Chughtai says. “Emerging markets have favourable demographics with the potential of growing long term.”
 

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