perspectives d’investissement
EM FX in the aftermath of the virus-induced sell-off
Key takeaways
- Since the outbreak of the COVID-19 virus, EM FX has come under continued pressure and has been the weakest link across EM asset classes.
- The pressure was directed mostly at currencies reliant on China, but over the past week, as global risk assets fell, even EMFX with stronger fundamentals have joined in the sell-off.
- We retain an assumption that the impact on global growth, while painful in Q1, will prove transitory. More aggressive monetary and fiscal policy easing by EM authorities, especially China, should allow EMFX to recover.
- However, until there are clearer signs of the situation normalising, EMFX will remain under pressure. That said, some currencies with good fundamentals and attractive valuations, like MXN, RUB, KRW, and IDR have weakened sharply. They should rebound once the dust settles.
- Despite ongoing growth uncertainties, we believe the CNY will continue to outperform other EMFX and be well supported by a decline in tourism-related capital outflows. More fiscal easing should contribute to a better performance in H2. We see USDCNY at 6.70 by year-end.
Since the outbreak of the COVID-19 virus, EM FX has come under continued pressure and has been the weakest link across EM asset classes. The pressure was directed mostly at currencies reliant on China. But over the past week, as global risk assets fell, even other currencies with otherwise stronger fundamentals as well as smaller linkages to China have joined in the sell-off.
We retain an assumption that the impact on global growth, while painful in Q1, will prove transitory. More aggressive monetary and fiscal policy easing by EM authorities, especially China, should allow EMFX to recover. Stronger policy easing by China historically has supported commodity prices and EM currencies. Hence, we would not extrapolate weakness into H2 from here.
That said, until there are clearer signs of the situation normalising (such as virus cases outside China peaking, or China activity normalising), EMFX will remain under pressure.
Regional summaries and forecast changes
ASIA:
The new coronavirus epidemic (COVID-19) will produce a material hit to the Asian region’s growth in the first quarter. We have revised down our Q1 growth forecast for China to 3.9% year on year (YoY). Its neighbouring countries, due to their extensive economic linkages with China, will also undergo a noticeable reduction.
Despite ongoing growth uncertainties, we believe the CNY will continue to outperform other EMFX and be well supported by a decline in tourism-related capital outflows. More fiscal easing should contribute to a better performance in H2. We see USDCNY at 6.70 by year-end, even though the cross could remain somewhat elevated in the short run.
Elsewhere, we remain neutral INR, although it could outperform other regional currencies. We have modestly revised lower the KRW forecast, but fundamentally think the currency will be well placed to perform in H2. IDR has been a recent casualty of the broader risk-off, but we like the currency in a “low for longer” global rate environment. However, we have downgraded our outlook for the MYR and remain bearish on the THB.
LATAM
We maintain our long-held upbeat view on MXN, but further extend our cautious BRL view by pencilling in further underperformance. CLP screens as increasingly cheap (even factoring in the sharp fall in copper prices) and will likely recover strongly after Q2 and the constitutional referendum (26 April). We are surprised by the COP’s relative resilience, but remain cautious on the currency.
CEEMEA
In CEEMEA, all currencies have come under pressure except for the ILS that is operating as the region’s very own currency safe-haven. We however have been surprised at the RUB’s weakness, even accounting for the sharp decline in energy prices. We think the currency presents value at current levels. We have downgraded our TRY forecasts further following weakening current account and very low real rates. Overall, we still like ILS, RUB, and CZK.
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