MARKET ANALYSIS
Figure 2: Emerging Market Currencies Are Undervalued
Appreciation We believe emerging market currencies are poised to appreciate against developed market currencies as UHDO *'3 SHU FDSLWD LQ HPHUJLQJ HFRQRPLHV FDWFKHV up with that in developed economies. If emerging HFRQRPLHV DUH DEOH WR FRQWDLQ WKHLU LQÁDWLRQ DW ORZ levels, the real appreciation of emerging market currencies will also result in nominal appreciation. Figure 2 compares the under/overvaluation of the purchasing power parity exchange rates versus their VSRW 86' H[FKDQJH UDWHV5
of 15 developed and 22
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(on the horizontal axis). Based solely on this
criterion, all the emerging market currencies, excluding the Brazilian real, are deeply undervalued especially the Indian rupee, Argentine peso and Taiwan dollar.
Investing in Emerging Market
Currencies 0DQ\ SHQVLRQ SODQV· ÀUVW IRUD\ LQWR WKH HPHUJLQJ PDUNHWV ZDV WKURXJK HTXLWLHV WKHQ À[HG LQFRPH There is now growing interest among pension plans in currency strategies as liquid, transparent and cost
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Emerging Market Currencies Are Poised for Real and Nominal
effective way to access the growth opportunities in the emerging markets.
A large proportion of the return from emerging market debt is attributable to the return on emerging market currencies. Over the past decade, almost half of the US dollar denominated return on the JP Morgan Global Bond Index Emerging Markets Composite Index is attributable to the returns from emerging market currencies (see Figure 2). In contrast, emerging PDUNHW FXUUHQFLHV KDYH FRQWULEXWHG FORVHU WR SHU cent of the US dollar denominated return on the MSCI Emerging Markets Free Index over the same period. It is worthwhile remembering that the currency impact FXWV ERWK ZD\V DQG QHHGV WR EH ULVN PDQDJHG 'XULQJ WKH
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DJDLQVW WKH 86 GROODU ZDV DOPRVW GRXEOH WKH JDLQ on the emerging debt.
(PHUJLQJ PDUNHW FXUUHQFLHV DUH VLJQLÀFDQWO\ PRUH liquid than emerging market equities and emerging market debt. Average daily turnover in emerging PDUNHW FXUUHQFLHV RI 86
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dwarfs average
GDLO\ WXUQRYHU RI 86 ELOOLRQ LQ HPHUJLQJ PDUNHW debt and US$65 billion in emerging market equities.
Emerging market currencies enable investors to EHQHÀW IURm the currency appreciation of emerging
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