Audio By Carbonatix
Emerging-market assets are headed for a monthly loss as declines in Argentina and Turkey sparked fears of global contagion and amid a renewed intensification of U.S.-China trade tensions.
The MSCI EM index of currencies is down 2.2 percent for August as of 10:18 a.m. in London, poised for a fifth monthly loss, the longest stretch since September 2015. South Africa’s rand headed for its worst August on record, while the lira rebounded on Friday after Turkey raised taxes on dollar deposits. In Asia, the Indonesian rupiah slid to its lowest since 1998, while the Indian rupee was set for its biggest monthly drop in three years and a fresh record low.
Plenty of investors -- including BlackRock Inc. and Pacific Investment Management Co. -- have viewed emerging-market declines as an opportunity to stock up on securities likely to benefit from growth rates set to outpace those of the rich world in the long run. But that’s not panned out this month, with developed-nation equities comparing favorably thanks in part to solid corporate earnings.
The emerging asset class’s latest woes came from Argentina, where the peso tumbled to a record low, prompting policy makers to boost a benchmark interest rate to 60 percent. In Turkey, a report that the central bank’s deputy governor was set to resign sank the lira. Also hurting sentiment: President Donald Trump was said to move ahead with a plan to impose new tariffs on China as soon as next week.
“Argentina’s problems will probably keep investors’ focus on emerging
markets with weaker fundamentals, leading to sell-offs in those countries like we’ve seen in Turkey,” said Koji Fukaya, chief executive officer at FPG Securities Co. in Tokyo. “Argentine assets are unlikely to see a turnaround soon with just the IMF support because there hasn’t been any fundamental improvements in the country.”
The latest currency crisis in Argentina adds to existing headwinds for emerging markets including the end of an era of cheap money, prospects of a global trade war, American sanctions and deep political uncertainties in places such as Brazil.
The rupiah fell to 14,750 per dollar, the weakest level since the 1998 Asian financial crisis, while the Indian currency slid past an unprecedented 71 against the dollar.
Asia needs to “guard against complacency” especially for those with deficits in their fiscal and current-account balances, strategists including Philip Wee at DBS Group Holdings Ltd. wrote in a note. “With heightened trade tensions threatening to erupt into a full-blown trade war, the region is on alert for disorderly capital outflows.”
South Africa’s rand added 0.3 percent, trimming its monthly drop of more than 9 percent. Turkey’s lira snapped four days of losses after the government raised taxes on dollar deposits of up to a year and scrapped a 10 percent tax on lira accounts with maturities longer than a year.
It’s not just the currencies that have been battered this month among developing economies. An index tracking their equities has lost over 3 percent, while the Bloomberg Barclays index of EM local-currency government notes is down more than 2 percent.
Some analysts say Asia still remains a relative haven given that region’s stronger economic fundamentals.
“At the end of the day, the correlations are not that pronounced and it’s not a monkey see, monkey do kind of reaction for EM Asian currencies,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank Ltd. in Singapore.
Argentina’s peso has dropped 29 percent against the dollar this month, the worst performer among major emerging-market currencies tracked by Bloomberg. Turkey’s currency follows closely, with a 26 percent slide. The Thai baht and South Korean won are at the top of the pack, heading for gains of 1.7 percent and 0.5 percent, respectively.
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