Making the case for investing in Emerging Market Currencies
Figure 3: Currency account for half of the total returns on the JPMorgan Emerging Bond Index
market economies without the unintended exposures to the duration risk and credit risk associated with emerg¬ing market debt.
Further, a currency portfolio that is fundamentally weighted i.e. by emerging economies’ share of global *'3 RU JOREDO WUDGH FDQ SURYLGH LQYHVWRUV ZLWK D better proxy of the growth opportunities in emerging markets than the market capitalisation of emerging market debt and equity indices. For example, the market capitalisation of China in the MSCI Emerging Markets Free Index of about 17 per cent VLJQLÀFDQWO\ under represents China’s share of emerging market *'3 ZKLFK H[FHHGV
FXUUHQF\ SRUWIROLR ZRXOG EHWWHU UHÁHFW WKH XQLYHUVH RI growth opportunities in the emerging markets.
Risk Aversion Filters Seek to Mitigate Drawdowns in Emerging
Market Currencies ,QYHVWRUV MXVWLÀDEO\ IHDU ODUJH GUDZGRZQV LQ WKH HYHQW RI D ÀQDQFLDO FULVLV +RZHYHU HYHQ LQ ´QRUPDOµ PDUNHW conditions we believe it is prudent to continually PRQLWRU ZDUQLQJ VLJQV RI GLVWUHVV LQ WKH ÀQDQFLDO markets because extreme drawdowns can be mitigated
06&, (PHUJLQJ ,QGH[ 9DQJXDUG (7) 6HSWHPEHU ,0) :RUOG %DQN 81 8%6 HVWLPDWH
ZHLJKWV
ZLWK ULVN DYHUVLRQ ÀOWHUV )RU H[DPSOH 0LOOHQQLXP Global’s global emerging market currency strategy SOXV D ULVN ÀOWHU *(0 3OXV LV D IXQGDPHQWDOO\ weighted emerging market currency strategy with a EXLOW LQ ULVN DYHUVLRQ ÀOWHU WKDW VHHNV WR PLWLJDWH WKH drawdowns that typically occur in periods of severe market stress through switching to domestic cash. Our ULVN DYHUVLRQ ÀOWHU V\QWKHVLVHV KLJK IUHTXHQF\ IRUZDUG looking indicators of turbulence across various asset FODVVHV +\SRWKHWLFDOO\ EHWZHHQ -DQXDU\ WR -XQH
WKH ULVN DYHUVLRQ ÀOWHU FRXOG KDYH UHGXFHG 11. A fundamentally weighted
WKH PD[LPXP GUDZGRZQ RQ D GLYHUVLÀHG SRUWIROLR RI FXUUHQFLHV IURP SHU FHQW WR SHU FHQW DQG improved the return-to-risk ratio of the portfolio from WR
%HQHÀWV RI D 6WUDWHJLF $OORFDWLRQ
to Emerging Market Currencies Given the unstable correlation between emerging market currencies and developed market equities DQG ERQGV LQYHVWRUV FDQ VLJQLÀFDQWO\ LPSURYH WKH performance of their traditional assets by allocating 15 per cent12
of their portfolio to a risk managed EDVNHW RI HPHUJLQJ PDUNHW FXUUHQFLHV )LJXUH VKRZV
the volatility, return, information ratio and maximum drawdown on the hypothetical GEM Plus Strategy,
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´0XOWLSRODULW\ 7KH 1HZ *OREDO (FRQRP\µ *OREDO 'HYHORSPHQWV +RUL]RQV
50 Currency Investor | Autumn 2011
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