© Guillaume Salomon
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In May Bernanke pointed at a possible scale back of the QE later this year, while yesterday he confirmed that monetary policy will stay accommodative for the foreseeable future. How do emerging markets react to such comments from the Fed Chairman?
It is creating a very challenging environment, because the question for the market is whether we are going to see some tampering of QE and when it would occur. However, there is a hope among market participants that Ben Bernanke is not going to be able to do it. Hence, there is a constant battle between bulls and bears, and emerging markets are really been affected by this. Therefore, what we have seen since May is heightened volatility in the emerging markets.
What performance do you expect to see from the emerging currencies when the actual tapering starts?
I think from the year onwards, this summer and the end of the year, there is going to be a very challenging environment. A lot of emerging markets have been propped up in the last couple of years by the wall of liquidity that was available. When the tapering starts to take place, this wall of liquidity is going to be partly lowered, partly reduced; consequently, the emerging markets are going to suffer.
What currency in the emerging market might be hit the most by the Fed's decision to taper the QE?
To my mind, the South African Rand is at risk. I believe that any country, where there is a relatively large current account deficit that needs to be financed by portfolio flows, is at peril. Therefore, South Africa is one of them. Additionally, I suppose Turkey is a bit under the pressure, but I think the central bank will try to continue propping up the currency. In general, I assume that CE4 are going to be affected, because growth in the Eurozone is rather weak. To sum up, it is the Rand that is still very much in jeopardy.
When other developed countries will start to stick to a more hawkish stance of monetary policy, will it also have a drastic effect on the emerging-market currencies?
If indeed the ECB, the BoE or the BoJ started to be more hawkish as well, I think that they would add the fuel to the fire and put emerging markets under more pressure. However, it is not the environment we are in at the moment. What is going on is the Fed is on the one end and the other central banks are being relatively dovish. However, when all of these central banks start being more coordinated and more hawkish, then I believe the emerging markets will be even more under pressure.
What emerging-market currency is the most attractive for investors now?
We have to look at the emerging market currencies, where there is a low non-resident bond exposure and, hence, lower volatility in the currency. In my view, there are a couple of countries that fulfill that criteria. I think the Russian Ruble is an interesting one as well as the Serbian Dinar, and also some other smaller markets. Nevertheless, there is very few that are not going to be exposed to this tapering, whereas the other emerging markets are going to suffer.