We are probably still in the sweet spot for the emerging market cycle. This doesn’t exempt us from the risk of corrections. It doesn’t eliminate geopolitical flare ups, trade war rhetoric, or the macro scare du jour. And it doesn’t make September/October calendar effects any less scary. But it does mean if you are an investor the wise choice is to stay in, stay the course.
(Pro memoria: the dominant error in professional investing is over-forecasting corrections and then chasing bull markets from a position of weakness.)
And my broader views on central banks and currency markets are laid out here.
Basically, it all boils down to:
- At this point in the global risk cycle the US looks mature and investors go abroad
- The Fed is closer to its terminal policy rate than expected; other CBs are at the front end of their normalization processes
- Investors desperately need yield, and emerging market currencies have it
- Country differentiation is less important than asset allocation
And demand is strong. I continue to hear of managers wanting to get into the space and/or increase their allocation, while, as PIMCO points out, local markets deepen.
Technically, the picture is strong. USDTRY and USDCLP have already broken down. It is likely that currency pairs like USDMXN, USDBRL and USDINR are to follow. Here are the charts: