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Focus on Asia – Volatility in EM currencies

May 24, 2018

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

June 2018 (covering May 2018)


  • The US equity market shrugged off concerns over the tariffs on steel and aluminum announced by the Trump administration and the retaliatory measures launched by other countries, ending May in positive territory.
  • We still like US equity as the market may benefit from an acceleration in US economic growth and the recently passed tax reform legislation.

Europe (including UK)

  • The UK and Europe equity markets rose in first half of May amid good corporate earning and economic fundamentals remained resilient.  However, a sharp correction was seen in the second half of the month on heightened political risk in Europe.
  • Valuations of European equities are attractive – especially compared to the US. Though the ECB is tapering QE, its balance sheet is still expanding and inflation is still below target.

Asia Pacific (ex Hong Kong ex China ex Japan)

  • Asia ex-Japan equities declined in May. Investors were broadly concerned with the recent upward trend in the US dollar and Treasury yields, leading to underperformance in key markets including India and ASEAN.
  • We remain constructive towards Asian equities and believe that resilient economic growth may continue to support positive earnings expansion.

Hong Kong and Mainland China (H-shares)

  • China equites rose in May and outperformed other Asia ex-Japan markets, reflecting solid economic and corporate fundamentals despite the return of volatility driven by external uncertainties. Benefiting from stable macroeconomic environment in China, Hong Kong equities also rose this month.
  • Macroeconomic data in China continue to reflect an economy where growth remains resilient in the midst of government reforms. On the other hand, the HK economy may see pressure from rising interest rate in second half 2018.


  • Japan’s equity market ended the month lower as sentiment was dampened by concerns surrounding the US-North Korea summit and US-China trade negotiations.
  • Economic conditions have shown signs of wavering. Companies continue to focus on cleaning up their balance sheets and enhancing shareholders’ returns. Monetary policy will likely remain loose, but we see increasing headwinds from recent yen’s strength.

Fixed Income​​​​​​​

  • Against the backdrop of political uncertainty, core government bonds (US Treasuries, UK Gilts and German Bunds) rallied, while peripheral European government and high-yield corporate bonds came under pressure.
  • We continue to believe that surprises in inflation or financial shock are the biggest risks to bond markets globally.

Emerging Markets​​​​​​​

  • A stronger US dollar undermined sentiment towards emerging equity markets in May. Sentiment in emerging Europe was adversely impacted by political developments in Italy, with equity markets in Greece and Turkey registering steep losses.
  • We remain constructive on emerging markets. We see improved political stability in some major Latin American markets, signs of improvement in domestic economies, resumption of earnings growth and signs of returning consumer confidence. We also remain constructive on emerging markets in Asia, however the recent strong price performance has somewhat reduced their attractiveness.

2018 Investment Outlook

We are dedicated to helping clients achieve their investment objectives

We are dedicated to helping clients achieve their investment objectives

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.


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