Emerging-market currencies may be starting to stabilize following the worst quarter in more than four years. The question is which of them will lead the next stage of the recovery.
One place to start is to check out what happened in the aftermath of the global financial crisis, and this suggests investors will focus on value, meaning the Mexican peso and Brazilian real are best placed to prosper. Money managers argue the outcome may be different this time though, with Asset Management One Co. saying China's economy is much bigger, and PineBridge Investments claiming the impact of the pandemic is likely to last longer.
The challenge of identifying which assets will lead the rebound from the virus turmoil has become a debating point as countries around the world achieve some success in limiting the spread of the pandemic. The U.S. has signaled it may start to reopen some parts of its economy, while the process is already advanced in China. Brazil and Mexico have taken different paths. Brazil's President Jair Bolsonaro has criticized social distancing policies, while Mexico's Andres Manuel Lopez Obrador drew criticism last month for moving too slowly to address the crisis.
"Emerging markets today are a real mixture of wheat and chaff," said Satoru Matsumoto, a fund manager at Asset Management One in Tokyo. "When you look at the correlation, there are of course some things you can draw from the historical trend. But in the end, the most important factors to watch for are real yields and the basic balance along with various stimulus policies."
During the initial period of the 2008 crisis, the correlation between the current-account situation and the performance of EM currencies performance was as high as 77%, according to data compiled by Bloomberg. During the second phase however, that dropped back to 22%, while the correlation with value climbed to 39%, becoming the main determinant.
Valuation became the main factor of the second stage of the recovery from the 2008-'09 crisis, outdistancing a number of other variables, including current-account position, credit rating, external debt-to-GDP ratio and foreign-reserve coverage, according to a Bloomberg study of 16 emerging currencies undertaken last week.