Markets: Emerging bear

THERE was much talk of the need for global rebalancing a few years ago, and one possibility was that emerging currencies should rise relative to those of developed countries. As the chart shows, in terms of real effective exchange rates, that adjustment has happened.

Some of this may be down to easy monetary policy in the developed world, although as the chart shows, only the yen has fallen a long way in real terms. The bigger shift may be that, despairing of the growth prospects of the developed world, investors piled into emerging market currencies and pushed them higher. That is the thesis of Matt King, the shrewd Citigroup strategist, whose latest client presentation is entitled “Tourist Traps: How Long will the Money Stay in EM (and credit)?”Mr King points out that in the period 2010-2012, emerging market bond funds were the top selling category in Europe. There was a good story to tell. Emerging markets offered an appealing growth story, seemed to be free of their crisis-riddled past, had attractive yields and, crucially, looked better than the developed alternatives during the euro crisis. But, of course, rebalancing works both ways. The US has managed to reduce its current account deficit; its counterpart, the surpluses in emerging market countries, have declined. And that is hardly surprising in view of the sharp rise in real EM exchange rates. To the …

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