By G. Sharmila
Michael Hasenstab
Templeton Global Macro believes that concerns of a systemic crisis in emerging markets have been exaggerated, as there are significant differences across the asset class.
In a statement today, Templeton Global Macro chief investment officer Michael Hasenstab noted that while most commodity exporters and emerging markets with poor macro fundamentals remain vulnerable, other emerging countries have solid policies and better underlying fundamentals that have not been recognised by market valuations.
“We believe investors should not view the emerging-markets asset class as a whole but should instead selectively distinguish between individual economies,” he said.
According to Hasenstab, over the last decade, several emerging market countries have increased their external reserve cushions, brought their current accounts into surplus or close to balance, improved their fiscal accounts and reduced US dollar liabilities – for example, today, countries like Malaysia and Mexico rely primarily on domestic sources of financing.
“Thus currency depreciations have not triggered solvency crises as in the past. In fact, depreciations have reduced vulnerabilities by boosting export competitiveness and supporting growth.
“Additionally, some countries have more external assets than liabilities, so currency depreciation actually lowers their debt-to-gross domestic product ratio. In our assessment, several specific emerging market currencies are fundamentally undervalued and are poised to appreciate over the medium to longer term,” he opined.
According to him, a strengthening US economy, along with the likelihood of higher US interest rates, may increasingly magnify the fundamental differences between healthy and vulnerable economies.
“We anticipate that countries with relatively stronger fundamentals, such as Mexico, will likely be in a better position to raise interest rates either in conjunction with US interest rate hikes or shortly thereafter. However, countries with relatively weaker fundamentals, such as Turkey and South Africa, are likely to be negatively impacted by US interest rate hikes,” Hasenstab said.
“We selectively added to our strongest convictions in emerging markets during the recent periods of volatility and believe that global market fundamentals will eventually reassert themselves. As the Federal Reserve (Fed) hikes rates and market interest rates go up, we expect markets to be better positioned to normalise.
“In our view, apprehensions about risks in places like Mexico, South Korea and Malaysia are likely to abate as these countries prove their resilience to Fed rate hikes.”
Hasenstab said that Templeton Global Macro continues to believe that an unconstrained global strategy is the most effective way to position for a rising rate environment because it provides access to the full global opportunity set.
Unconstrained strategies, he said, can adjust duration to any suitable level for prevailing interest rate risks; this includes driving overall portfolio duration down to near zero while taking negative duration exposure to US Treasuries.
“We are also able to selectively add suitable duration exposures from specific emerging markets with relatively higher yields.
“Additionally, the unconstrained nature of our strategies provides flexibility to directionally position (long positions and short positions) across currency markets, which present a wide range of valuation opportunities. We have used shorts of the euro and yen to guard against broad-based strengthening of the US dollar while taking long positions in select emerging-market currencies with attractive longer-term valuations,” he said.
He said that Templeton Global Macro has continued to position its strategies for rising rates by maintaining low portfolio duration and aiming at a negative correlation with US Treasury returns.
“We have continued to actively seek select duration exposures that can offer positive real yields without taking undue interest rate risk, favouring countries that have solid underlying fundamentals and prudent fiscal, monetary and financial policies.
“When investing globally, several investment opportunities may take time to materialise, which may require weathering short-term volatility as the longer-term investing theses develop.”
He explained that during 2015, they shifted out of markets that they were previously contrarian on (that were once distressed but have now recovered and become consensus) in order to reallocate to positions that have fundamentally attractive valuations for the medium term ahead.
“We also maintained our exposures to several of our strongest investment convictions and added to those types of positions as prices became cheaper during the periods of heightened volatility,” he said.
“At the start of 2016, we are encouraged by the vast set of fundamentally attractive valuations across the global bond and currency markets.
“Currently we favour currencies in countries where inflation is picking up and growth remains healthy, yet the local currency remains fundamentally undervalued. Looking ahead, we expect continued depreciation of the euro and yen, rising US Treasury yields, and currency appreciation in select emerging markets,” he said.
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