Emerging Market Rout Approaching Bottom
$USD, $AUD, $NZD
Franklin Templeton Investments says the rout in emerging markets may be nearing a bottom, but says that there are still countries like the Philippines that will suffer.
Given the uncertainty, the money manager is keeping a net neutral USD position, while making trades including shorting the Philippine peso, as well as betting the Aussie (AUD) will decline Vs the New Zealand dollar (NZD), said the managing director of fixed income for Australia at Templeton.
“We are trying not to make the big dollar decision at the moment because we feel like it could pop either way,” he said in an interview in Sydney. “We are preferring to choose where there’s relative value and who we expect to be winners and losers in the emerging market complex.”
The rout in emerging-market assets this year was spurred by higher Treasury yields and US tax cuts, alongside angst over the escalation of trade restrictions between the US and China.
Still, Templeton’s willingness to sit out a directional bet on the dollar highlights how divided money managers are after the greenback has gained more than 5 percent since mid-April.
JPMorgan Asset Management and Man Group Plc are among those expecting further strength. Others such as DoubleLine Capital’s Jeffrey Gundlach see a decline by year’s end.
Speculative participants are still betting on further dollar gains, data from the Commodity Futures Trading Commission show.
It could go either way.
The USD might appreciate more if investors continue to seek haven assets amid worsening US and China trade relations, though it may be weaker if the US economy starts to overheat and the chance of a slowdown starts to weigh on investors’ minds, he said.
“For us here locally we’re focusing on the Asia region, it’s about countries that are in a better fiscal position, good domestic stories and good policy actions by their leaders.”
Some emerging markets, including Turkey and Indonesia will continue to see pressure.
The core of Templeton’s fixed-income portfolio consists of investment-grade corporate bonds. But even there, things are looking expensive, he said.
Below is an excerpt of an interview with the director of fixed income for Australia at Templeton, the California-based money manager, which oversees $722-B in assets, as follows:
Have we seen the end of the emerging market rout?
We are closer to a bottom, although I don’t know that we’ve seen a real capitulation in emerging markets. There’s been pressure, but in some ways it’s been orderly. We have not seen the shock and awe, for example, through a real dive in US Treasury yields and a full flight to quality.
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