© Cristian Maggio
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In my view, the Indian Rupee seems to be the most attractive at the moment, as it is offering the highest value in total return terms. I think the Rupee enjoys the following two aspects: pretty relevant carry and a potential appreciation against the U.S. Dollar, as the reform momentum, which started last September, is driven by the government decision to liberalize the economy as well as to drive more FDI in the country.
With 2013 being another year full of monetary easing by developed world banks, do you expect a substantial boost in demand for emerging market assets?
I believe that we will see a similar trend in the first part of the year with some central banks still easing and then probably holding rates stable before resorting to rate hikes next year. This, in turn, is probably going to limit the attractiveness of bonds, but not as long as yields remain stable or if there are prospects for going lower in the short term. However, as the central banks will start increasing interest rates or as we get closer to the interest rate hikes, then investors have to differentiate between various assets. The primary reason behind that is the fact that bond yields would start rising again, which is clearly not an attractive proposition. Currencies could be well supported by higher interest rates, and by likely good performance of the local equity market. In a nutshell, I would say it is going to be a mixed bag of good and bad performance of EM assets, and there will be probably more differentiation in 2013.
The Fed's loose monetary policy puts pressure on the U.S. Dollar, and thus hurts U.S. trading partners, the currencies of which are under the threat of appreciation. Do you think policy makers in those countries may intervene in order to halt appreciation as a means of promoting exports and domestic growth?
There is the so-called currency war that is going on. Most policy makers, both central bankers and governments, do not seem to dislike the weak currencies, which are supposed to support exports. Nevertheless, there are several nations among the leading emerging countries, which are net importers, meaning that they have either negative trade deficits or negative current account deficits. Hence, they may have a net advantage from a stronger currency. What I think will happen is that a trend for weaker currencies, in order to support exports, will continue, probably, in the first part of the year. However, as we move on towards higher inflation rate in the second part of the year and, especially, next year, some of the central banks, for example in Brazil, will have to allow a little more appreciation in their currencies, because that is going to curb imported inflation. To sum up, I think the currency war theme will lose strength as we move forward and it will probably start fading into 2014.
Japan's central bank plans open-ended purchases in 2014. In your view, how this move will impact Asian currencies?
That is likely to keep the Japanese Yen relatively weak versus other currencies, in particular the Asian units. In this respect, assuming other factors stay unchanged, currency appreciation against the yen will not bode well for the competitiveness of emerging countries in Asia. At the same time, as Japan is the one of the major investing countries in EM assets, stronger EM currencies should increase the attractiveness of EM returns for Japanese investors. This is likely to increase support for EM bonds and provide an additional upside driver for EM currencies.