Thursday 28 Mar 2024
By
main news image

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 21 - 17, 2016.

 

The volatile emerging market currencies are expected to stabilise this year, according to Adrian Mowat, managing director and chief strategist for Asian and emerging market equities at JP Morgan in Hong Kong.

He says the volatility in currencies seen last year was due to emerging markets adapting to macroeconomic changes such as the plunging oil price. Currencies were used as “shock absorbers” to make the economies of emerging markets more sustainable. Russia and Argentina are two examples.

“Russia was incredibly successful at managing the volatility in its commodity market when its oil exports came down. It used its currency effectively as a shock absorber and its economy has remained intact,” says Mowat.

“The Argentinian peso also saw a spike last year. There was a change in government and it reset the [currency’s] exchange rate to the market exchange rate. This shows that the country is moving into a more sustainable economic model.”

Mowat was speaking at the Global Emerging Markets Programme organised by the Securities Commission Malaysia on March 15. He was one of the panellists for the session on “The rise and fall of currencies and commodities — managing through volatility and complexity”.

With the exception of China, says Mowat, there were no capital outflows from emerging markets last year when the US Federal Reserve raised its interest rate for the first time in nearly a decade. This was despite warnings in the market that capital would leave emerging markets and move into developed ones.

While the market is timing when the Fed will increase interest rates this year, emerging market currencies are not expected to experience higher volatility, says Mowat. “The warning [of capital outflows] proved to be incorrect. When the Fed increased its rate in December last year, we saw no outflows from emerging markets except China. I think for now, the volatility of [emerging market] currencies will moderate in 2016 despite the losses in the capital market.”

Looking at China, Mowat expects its economy to continue to moderate. Referring to the JP Morgan Equity Strategy China Economic Heat map, he notes that the Chinese economy has been contracting since 2014, especially in industrial activity and investments.

“I think it is important [to be careful] when people use the word ‘rebound’ [to describe China’s economy]. It means that when the investments go down, consumption goes up. But what is really happening in China is its investments are going down, and so is its consumption but at a slower pace,” he says.

Nevertheless, Mowat is of the view that Chinese consumption has been holding up quite well and this is reflected in its housing demand. He notes that in April last year, there was a year-on-year increase in housing demand and that this was genuine as households took advantage of the lower mortgage rate. Chinese consumers have very little leverage compared with most other Asians.

Mowat also says China’s demand for commodities is not expected to pick up in the next few years as it slowly transforms into a consumption-driven economy. This was what the Japanese economy experienced in the 1980s.

“We use the analogy of the 1980s when [global] commodity demand was driven by Japan. Then, you begin to see a change in the dynamics of the Japanese economy where consumption started to grow fairly well [and demand for commodities dropped],” he adds.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.

      Print
      Text Size
      Share