Our investment teams provide insights covering markets events, asset classes and investment-related topics effecting our clients.
Focus on Asia – Volatility in EM currencies
Q1) Year-to-date, we have seen some Emerging Market currencies, especially Latin America, being sold off on the prospects of US rate normalization. It seems that Asian currencies have been more resilient. In your opinion, what’s the reason behind this?
Dr Greenwood: Those EM currencies that sold off most in early 2018 were those that had been plagued by recent monetary or political instability (Argentina, Turkey, Brazil). Conversely, those EM currencies that have outperformed have been mainly those that are seen as oil/energy exporters (Colombia, Mexico and Malaysia). This is in line with the recent strong performance of oil prices.
The resilience of the Chinese CNY, Thai THB, Taiwanese TWD, Korean KRW and Singapore SGD seems to be due to the fact that they are mostly manufacturers that have enjoyed a year or two of improving exports, in line with improving world trade. Although recently economic growth has slowed in the US (Q1) and is slowing in Europe, these slowdowns are probably only temporary following a very strong end to 2017. In my view the most likely scenario is a continued expansion of the US business cycle which should translate into further growth of Asian exports.
Q2) Recent global / Asia economic data have come in softer than expected (e.g. as shown in Citi’s Economic Surprise Index), what do you think are the major reasons for the data disappointment?
Dr Greenwood: The main reason for the recent weakness is that economic expectations and growth were at an unsustainable level in the final quarter of 2017. Encouraged by the proposed personal and corporate tax cuts in the United States that were under discussion at that time and signed into law on December 22, global equity markets continued with a strong rally until the end of January. By any standards that upswing was over-exuberant. The correction in February and March has returned US stock market indices to roughly where they were at the end of December.
It was a similar story in the US economy. Coincidentally, the Citi Economic Surprise Index for the US (an index that measures data surprises relative to market expectations) peaked at 84.5 on December 22 – the same day Mr Trump signed the Tax legislation -- but has basically been falling since then, declining to 10.9 on May 22.
Consistent with the slowdown in developed economies, emerging Asian economies have seen falls in their exports in recent months. For example, Korean and Taiwanese exports (in US$ terms) have both declined since yearend. Others have seen declines in PMIs, factory orders and so on. All this is essentially a spill-over effect from temporary softness in the US and European economies.
Q3) Do you think Asian currencies would be vulnerable for sell-off in the months ahead? What are the positive and negative factors you could see for Asian currencies in the coming few months? And more importantly, under this situation, could further rate hikes by the US pose a threat to Asia?
Dr Greenwood: The main negative for all EM currencies is the continuing increase in USD interest rates and bond yields under the Federal Reserve’s normalization policies. If interest rate differentials between the USD on the one hand and Asian and EM currencies on the other continue to widen, we should expect some further appreciation of the USD. A strong USD has historically been negative for EM currencies, especially commodity producers. This is a price effect that will hurt higher cost EM economies, and benefit only those that are price-competitive, which includes some Asian manufacturers.
However, provided that the US economy continues to grow (i.e. this is only a rise in US rates and not a downturn in US economic growth), then Asian manufacturing exporters should continue to benefit from volume growth. But we should not exaggerate these movements and effects. So far the USD has strengthened only 4-5% on a trade-weighted basis since mid-April, essentially recovering the ground lost in December and January. The USD is still about 8% below where it stood in December 2016. Compared to Asian and EM currencies the USD is still relatively weaker than it was in December 2016.
Market Outlook - Monthly
Europe (including UK)
Asia Pacific (ex Hong Kong ex China ex Japan)
Hong Kong and Mainland China (H-shares)
2018 Investment Outlook
The surging markets of the past year have taken place against a backdrop of macro developments whose long-term impact on the world economy has yet to be realized: uncertainty regarding the UK’s withdrawal from the European Union, potential tax reform in the US, North Korea’s nuclear weapons testing, continued oil price volatility and the outcome of key elections in Germany, France, Iran and other countries.
With this as context, the year ahead promises to be interesting and challenging as well. In this dynamic environment, we have a strong view that clients are best served by portfolios that combine the advantages of active, passive and alternative capabilities.
At Invesco, we’ve built our firm over many years with a single focus: to help clients achieve their investment objectives in a variety of markets. We provide a comprehensive range of investment capabilities, delivered through a diverse set of investment vehicles. We draw on this comprehensive range of capabilities to provide customized solutions designed to deliver key outcomes aligned to client needs, which are our most important benchmark.
Our experienced investment teams are located in locations all over the globe, which we believe is a real strength of the firm. Maintaining a presence on the ground in key cities enables our investment teams to stay close to developments that impact the markets and the companies in which they invest.
An important part of achieving your investment objectives depends on keeping ahead of the dynamics that drive movements in the global markets. Working with our investment teams, we’ve developed this 2018 outlook to provide insights that can help you plan for the future and make decisions about your investments.
We hope you find this information helpful. As always, we remain focused on helping clients achieve their investment objectives – wherever the markets take us.
The above materials have been prepared only for those persons to whom Invesco has provided it for informational purposes only. It is not an offering of a financial product and is not intended for and should not be distributed to retail clients who are resident in jurisdiction where its distribution is not authorized or is unlawful. Circulation, disclosure, or dissemination of all or any part of the above materials to any person without the consent of Invesco is prohibited.
The above materials may contain statements that are not purely historical in nature but are "forward-looking statements," which are based on certain assumptions of future events. Forward-looking statements are based on information available on the date hereof, and Invesco does not assume any duty to update any forward-looking statement. Actual events may differ from those assumed. There can be no assurance that forward-looking statements, including any projected returns, will materialize or that actual market conditions and/or performance results will not be materially different or worse than those presented.
The information in the above materials has been prepared without taking into account any investor’s investment objectives, financial situation or particular needs. Before acting on the information the investor should consider its appropriateness having regard to their investment objectives, financial situation and needs.
You should note that this information:
All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. Investment involves risk. Please review all financial material carefully before investing. The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
The distribution and offering of the above materials in certain jurisdictions may be restricted by law. Persons into whose possession this marketing material may come are required to inform themselves about and to comply with any relevant restrictions. This does not constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation