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Don't expect a Fed-fuelled currency war, says EMD chief

Don't expect a Fed-fuelled currency war, says EMD chief

The much-awaited Fed rate rise will not spur a currency war in emerging markets despite commentators predicting large-scale currency depreciation.

That’s according to Vontobel’s head of emerging market bonds, Luc D’Hooge, who thinks commodities prices are much more relevant to the emerging sector than Fed moves.

D’Hooge, who runs the Vontobel Emerging Markets Debt fund, told Citywire Global: ‘Emerging markets are not really depreciating their currencies anymore, as only a minority can do that. Most are free floating and that's a really important difference.’

When you have an interest rate rise, D’Hooge said it is not as bad a development for EMs as many think. ‘In the past two hiking cycles, emerging spreads did come in against US treasuries, and in one of them, even the yields came in too, so it's not a necessarily a negative thing.’

In such cases, to D’Hooge said, emerging market investors get very nervous before the move, and spreads tend to widen, but then, when the game is done, they normalise. ‘Much more important than the first move itself is the speed at which they will move further and how far,’ he said.

Mind the barrel

D’Hooge said there was not much profit to take in the immediate wake of the rate hike for emerging investors. ‘We didn't see much reaction. We saw a small flattening in the US bonds rates and we did see local currencies rise a little bit, but then they went down a little bit.’

What currently looks attractive, D’Hooge said, is external debt, given the level of the spreads. But, he said, it is only something for people who can stomach volatility.

‘That’s because what matters more for EMs is commodities prices. That's why I think it is a good moment to get in, even if I am not saying commodities prices won’t go down again.’

D’Hooge, who has a background as a geologist, expects oil price to remain range bound between $40 and $60 in 2016, but with a possibility that OPEC will cut production somewhere during the year.

The Vontobel Emerging Markets Debt fund lost 2.79% in US dollar terms over the 12 months to the end of November 2015. This compares to a loss of 8.84% by the average manager in the Emerging Markets Global Hard Currency Bonds sector over the same period.

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