Investing in Emerging-markets Currencies Post-invasion

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Richard Lawrence, executive vice president in Global Fixed Income at Brandywine Global Investment Management.

So what’s going on in the emerging market? How has the Russian invasion impacted emerging markets and where do we see opportunity right now? Well, emerging markets, actually pre the Russian invasion, emerging markets were performing particularly well. When we look at the emerging markets currency complex, we were seeing really good performance across all regions of emerging markets, prior to the invasion. Certainly from a bond point of view, certain markets had backed up a little bit, as central banks were raising rates, but the currencies were performing quite well. And that was very consistent with a view that global growth was going to be softer in ’22, but certainly broadening out, which is an environment in which we would’ve expected the U.S. dollar to be a little bit weaker. And that was another reason why it looks like emerging market currencies were performing quite well.

Obviously, the invasion has changed some of that quite meaningfully. It’s really become a little bit more of a regional story right now. And by right now, I’m talking in the March timeframe, post-invasion. Latin American markets are actually doing pretty well. And unsurprisingly, it’s the markets in Eastern Europe that are struggling the most. So that would be in Poland, and Hungary, and Czech. Whereas [inaudible 00:01:50] holding up quite well, Brazil, Mexico, Columbia, Chile, et cetera. Asia has been more of a mixed bag, a little bit flatter.

The other aspect of the story is of course commodities. Right now with the disruption in commodity supply that’s related to the Russian invasion, we’re seeing a big bid up in commodity prices. And so the EM commodity exporters are going to be beneficiaries of that. So, where does that provide opportunities for investment right now? Well, in emerging markets FX, we would favor exposures to currencies like the Chilean peso, which is a copper linked currency, the Brazilian real, which is linked to iron ore as well as agricultural commodities. We actually also like some of the developed market currencies for the same reasons, so the Norwegian krona, Swedish krona, New Zealand dollar, Aussie dollar as well.

But back to emerging markets, we also do like some of those Eastern European currencies. Yes, they’ve come under some pressure post-invasion, but we’ve got hawkish central banks in Eastern Europe. And as we move, and hopefully move to a point of resolution in the invasion, a lot of cheapness has been created in those currencies. Sets us up for a nice rebound. In terms of emerging market bond markets, I think the second half of the year gets really interesting here as these central banks and their hiking cycles. So we like rates in Brazil, Columbia, South Africa, Chile could become interesting, and Mexico is still another market that we like and have exposure to.