EMERGING CURRENCIES’ BUNGEE JUMP
What Sigmund Freud says about death wishes is possibly most relevant of all
Hero-to-zero (or the reverse!) themes are not common in international finance, particularly in the hyper-volatile emerging dark alleys of the planet. So the Indian rupee lost almost 40 per cent of its value between summer 2011 and summer 2012, before staging a 15 per cent rebound as New Delhi imposed punitive taxes on gold imports, the Reserve Bank of India got a Chicago monetarist rock-star governor and Narendra Modi as PM captivated the imagination of Dalal Street and its offshore acolytes. However, the Russian rouble, despite Moscow’s $500 billion in reserves and sovereign wealth assets, dropped 10 per cent in 2014 once Vladimir Putin’s Kremlin resurrected the Great Game in Crimea/Ukraine and the West retaliated with financial sanctions. The Indonesian rupiah lost 21 per cent in 2013 but is the best-performing global currency against the US dollar in 2014. The Pakistani rupee suddenly jumped five per cent against the dollar as the State Bank’s liquid reserves suddenly rose by $1.5 billion after state visit to Islamabad by Saudi Crown Prince Salman, Foreign Minister Saud Al Faisal and Deputy Defence Minister Prince Salman bin Sultan.
The Brazilian real rose suddenly after Sao Paulo and Rio de Janeiro financial markets were agog with rumours that President Dilma Roussef would decline to run for a second term. Emerging-market debt and currencies investing is the closest thing to three-dimensional chess in my life, a testament to the Heisenberg Principle in quantum physics. The act of observation changes the nature of the object being observed. Or, as the philosopher Freddy (Mercury) Nietzsche once put it, gaze not into the abyss lest the abyss gaze back (which in my world means a margin call on Radio Gaga!). Strangely enough, I studied finance at Wharton and international relations at Penn. However, I discovered that what Janet Yellen or Dr Draghi say about interest rates is less important in the global markets than Vladimir Putin’s imperial rants on the vanished Soviet empire or Tayyip Erdogan’s neo-Ottoman xenophobia. In emerging markets, what Sigmund Freud says about death wishes is possibly most relevant of all.
In 2013, emerging-market currencies were leprosy even before the Bernanke Fed triggered the global taper tantrum in May. However, the markets now believe that Dr Yellen is an uber-dove and China’s Politburo will come through with a shock and awe stimulus to bailout the (shadow?) banking system of the Middle Kingdom. Ergo, buy high-beta, high-carry emerging currencies where things have the potential to move from godawful to just plain awful. This is the sweet zone for money-making since the dozens of time or at least 1990, when I began to trade the markets on Wall Street just in time for Saddam’s invasion of Kuwait, the collapse of Drexel’s junk bond empire and a London property crash.
The momentum de jour in Planet Forex is in China-linked currencies (and assets). Hence my conviction that the Taiwan Dollar, with its 10 per cent GDP current account surplus and credible Taipei central bank, has at least five per cent upside against the US dollar. I cannot buy the Turkish lira or the Indian rupee any longer since both countries have such deep structural problems (high inflation, current account deficits, toxic politics, budget indiscipline, wildly overleveraged banking systems, inflated property markets) that it is only a matter of time before a 300,000 US payroll number awakens the bond vigilantes in the US Treasury bond market and end the High Carry Fragile Five Xanadu with a funding crisis. So, yes, I missed the bull run in Turkey and India in the past two months but playing Russian roulette with five bullets in the chamber is simply not consonant with my risk reward calculus. Why invest at all, unless armed with an unfair edge like a subscription to KT?
An emerging markets currency I can trust, albeit against the yen. Mexico. Mexican peso debt is undervalued, the Texan shale oil/ onshore manufacturing boom has obvious spillover impact across the Rio Grande, the Hacienda is the most credible Finance Ministry in Latin America, energy reforms could bring $50 billion into Pemex’s offshore drilling in the Gulf of Compeche. An overvalued currency? The South Korean won at 1,050 and Azanian Rand at any price since the Xhosa-Zulu blood feud continues.