The going was extremely tough for emerging market currencies in
2013 with the
WisdomTree Emerging Currency Fund
) shedding about 6% of its value. Steeper decline had been noticed
in some currencies like Indian rupee (down 12.6%), Turkish lira
(down 18.6%) and South African rand (down 20.4%). The firmness in
dollar following the onset of QE taper talk in 2013 and a general
risk off trade created this malaise.
On top of it, all these currencies were down in low-single digit in
the last 15 days of January thanks to the Fed's long-apprehended
(by investors) decision to scale back QE program from
January. With a bit of risk off trade, Emerging markets seem
to have lost their appeal, especially as U.S. treasury yields
continue to rise. With a possibility of a faster QE trimming in the
course of 2014 and flight of foreign investments from these
developing nations, currencies are likely to weaken further in the
coming days (read:
Where Will Global Currency ETFs Go in 2014?
Rate Hike a Common Resort
Amid such a backdrop, central banks in Turkey and South Africa
stunned investors by raising key rates, to prop up their struggling
currencies on January 28 and 29 respectively. India also joined the
bandwagon around the same time, but the step was taken to contain
its stubbornly high inflation. Whatever be the prime cause, Indian
rate hike should support its ailing currency.
Let's see in details how proactive the individual central bank was
in shoring up their stressed currencies (read:
3 Currency ETFs Crushed in Emerging Market Rout
Turkey raised its overnight lending rate sharply on January 28 from
7.75% to 12%
, one week repo-rate from 4.5% to 10% and overnight borrowing rate
from 3.5% to 8%. Soon after the announcement, Turkish currency lira
went to rallying and gained as much as
, though it lost some of those gains later.
Higher rates will attract foreign investors to lira-denominated
investments which will in turn boost the value of the currency
Turkey ETF Continues to Struggle as Currency
The scenario was little convincing for South Africa which went for
just 50 bps rate hike to 5.5% on January 29 long after 2008.
Notably, the South African rand has depreciated to a five-year low
against the dollar in recent days losing about
in the last eight months. As per analysts, countries like South
Africa need to protect its currency desperately as
40% of its total outstanding stock of debt
is held by
Without such measure, it will be hard to keep up the inflow of
foreign capital over the long term.
On January 28, the Reserve Bank of India (RBI) unexpectedly hiked
its repo rate by 25 bps to 8% in a bid to contain inflation. With
the latest hike, India has raised its repo rate by the same quantum
thrice in the five trailing months (read:
A Weaker Rupee--Boon or Bane for India ETFs?
Are Rate Hike Measures Justified?
No doubt, rate hike will rein in these countries' growth rates.
This is surely no good news especially at a moment when growth
rates of emerging nations are slowing and investor focus has
shifted toward developed nations where the economic dynamics are
improving steadily. Quite expectedly, markets of the concerned
nations did not welcome the step on the possibility of sluggish
growth. A substantial fall in ETFs related to the respective
countries affirms this fact.
Investors should note that the only pure-play on Turkey
iShares MSCI Turkey Investable Market ETF
) slumped 3.24% at the close of January 29, the biggest South
iShares MSCI South Africa ETF (
tumbled 3.79% while major Indian ETFs like
WisdomTree India Earnings Fund
iShares India 50
iShares MSCI India
) lost 1.61%, 2.25%, 1.91% and 2.20% respectively.
Such measures might help in boosting investors' confidence in the
emerging markets, though at the cost of
reduced growth, especially in the current environment when emerging
currency devaluation is a large factor.
On a positive note, even after being reduced, growth rates are
still decent at about 4% to 5% in emerging nations, better than
many fast-growing developed countries.
However, barring some initial euphoria, Turkish lira and South
African rand failed to hold up the rally versus the greenback. With
the Fed announcing another round of $10 billion cut in the QE
program, the USD has once again taken the center stage.
In a nutshell, the greenback will rule the year 2014. Apart from
the dollar, no other currency is promising outright appreciation
relative to the USD. It is advisable to stave off the
emerging market currency exposure. Investors with high risk
appetite wanting to tap these markets, should be extremely choosy
and take closer look at each and every Fed move.
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WISDMTR-EMG CUR (CEW): ETF Research Reports
WISDMTR-IN EARN (EPI): ETF Research Reports
ISHARS-S AFRICA (EZA): ETF Research Reports
ISHARS-M INDIA (INDA): ETF Research Reports
ISHARS-SP INDIA (INDY): ETF Research Reports
ISHRS-MSCI TURK (TUR): ETF Research Reports
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