Ye Xie, Maciej Onoszko and Liau Y-Sing
Emerging market currencies from the rand to Turkey’s lira and Indonesia’s rupiah are benefiting from the crisis in Ukraine as investors move funds out of Russia and into other high-yielding markets.
The rand has advanced the most among 24 developing-nation peers over the past five days, strengthening 1.3 percent against the dollar, while the rouble and currencies across eastern Europe were among the top losers.
Since last week’s downing of Malaysian Airlines flight MH17 by a missile, which the US says was probably supplied by the Russian military, an index of 20 emerging currencies has jumped 0.6 percent.
While global investors have withdrawn $199 million (R2.1 billion) from Russian bond and equity funds this month, they have bought the most Indonesian stocks since March and added holdings of South African bonds, according to data from EPFR Global and stock exchanges.
Benchmark borrowing costs in countries such as Turkey and South Africa are at least 6 percentage points above those of the US, ranking the highest among developing countries along with Russia.
“Flows
to emerging-market funds seem to be continuing, and they have to invest somewhere,” Simon Quijano-Evans, the head of developing-nation research at Commerzbank in London, said on Monday. “Russia has come under pressure, while the rand and lira have benefited from capital outflows from there.”
Improvements in trade balances of developing nations have made investors more willing to keep money in these regions than in the past when crises would spark a sell-off across emerging markets, according to Barclays.
This month’s outflow from Russian funds has pushed withdrawals to $348m since the end of February, just before it annexed Ukraine’s Crimea region, according to EPFR Global. Investors added a net $12.9bn across emerging markets in the same period.
Koon Chow, the head of emerging-market strategy at Barclays, said last week: “Russian developments are likely to divert money into other emerging markets rather than scare investors away from emerging markets.”
Sentiment toward Russian assets has soured further since the shooting down of the passenger jet. EU foreign ministers are debating whether to expand sanctions against President Vladimir Putin. The stand-off is made more complicated by Russia’s status as the largest energy exporter, supplying nearly a third of the EU’s natural gas.
The rally in emerging currencies would end if the conflict deepened and drove up volatility, Lars Christensen, the chief emerging-markets analyst at Danske Bank, said.
JPMorgan Chase’s gauge of price swings for emerging-market currencies was at 5.84 percent, near a record low of 5.82 percent set on July 1, making higher-yielding assets more attractive.
“We are quite negative in our outlook for Russian markets, but that doesn’t mean there is a benefit for others,” Christensen said on Tuesday. “An escalation of the crisis in Ukraine is harmful for all emerging markets.”
Countries from Turkey to South Africa have cut their trade deficits while raising interest rates since the last crisis to hit emerging markets. Developing nation currencies tumbled in January when protests in Ukraine and Thailand shook confidence that was already hurt by an economic slowdown in China and the reduction of the Federal Reserve’s monetary stimulus.
At 11 percent, the three-month deposit rate in Turkey is the highest in developing countries after Argentina, and compared with 9 percent in Russia, 8 percent in Indonesia and 6.5 percent in South Africa.
Global funds have bought a net $515m of South African bonds this month, extending inflows this year to $1.8bn, JSE data show. The rand has risen 1.8 percent since Thursday when the Reserve Bank raised its policy rate to 5.75 percent.
In Indonesia, foreign investors bought $1.03bn more local stocks than they sold this month, set for the biggest monthly net inflow since March, exchange data show. The rupiah pared its gain for the month to 3 percent as the presidential poll was fought.
Société Generale recommended on Friday that its clients buy the rand against the rouble to hedge an “escalation of geopolitical risks” as investors look for high-yielding assets in less volatile regions. – Bloomberg