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Emerging market rout nearing turning point, says Templeton
[SYDNEY] Franklin Templeton Investments says the rout in emerging markets may be nearing a bottom, though reckons there are still countries that will suffer, like the Philippines.
Given the uncertainty, the money manager is keeping a net neutral dollar position, while making trades including shorting the Philippine peso, as well as betting the Aussie will decline against the New Zealand dollar, said Chris Siniakov, managing director of fixed income for Australia at Templeton.
"We are trying not to make the big dollar decision at the moment because we feel like it could pop either way," Mr Siniakov said in Sydney. "We are preferring to choose where there's relative value and who we expect to be winners and losers in the emerging market complex."
The rout in emerging-market assets this year was spurred by higher Treasury yields and US tax cuts, alongside angst over the escalation of trade restrictions between the US and China. Still, Templeton's willingness to sit out a directional bet on the dollar highlights how divided money managers are after the greenback has gained more than 5 per cent since mid-April.
JPMorgan Asset Management and Man Group plc are among those expecting further strength. Others such as DoubleLine Capital's Jeffrey Gundlach see a decline by year's end.
The greenback's resurgence has prompted US President Donald Trump to previously jawbone the currency. That's not deterring speculative investors such as hedge funds that are still betting on further dollar gains, data from the Commodity Futures Trading Commission shows.
It could go either way, Mr Siniakov said. The dollar might appreciate more if investors continue to seek haven assets amid worsening US and China trade relations, though it may be weaker if the US economy starts to overheat and the chance of a slowdown starts to weigh on investors' minds, he said.
"For us here locally we're focusing on the Asia region, it's about countries that are in a better fiscal position, good domestic stories and good policy actions by their leaders," said Mr Siniakov. Some emerging markets, including Turkey and Indonesia will continue to see pressure, he said.
The core of Templeton's fixed income portfolio consists of investment-grade corporate bonds. But even there, things are looking expensive, he said.
Below are edited excerpts of an interview with Mr Siniakov and Andrew Canobi, director of fixed income for Australia at Templeton, the California-based money manager, which oversees US$722 billion in assets:
1. What else are you buying?
We're continuing to hold inflation protection - we play in the zero coupon swap space in US inflation markets. If late-cycle inflation does spike in the US, then we have some protection. We've also taken some options on some credit-default swap indices.
2. Why short the Aussie?
We're looking at an Australian dollar range of 70 to 75 US cents for now. The Aussie dollar is being driven lower not by domestic factors, even though the property market headlines have some offshore investors shorting the Aussie. It's a risk currency that's caught up in the emerging market malaise. Until those issues go away, the path for the Aussie is likely lower.
On the other hand, New Zealand's economy is not in bad shape. The market's gone from a tightening bias to now a little bit of easing. The kiwi dollar suffered because of that. We still think the hurdle's pretty high for an easing.
3. Have we seen the end of the emerging market rout?
We are closer to a bottom, although I don't know that we've seen a real capitulation in emerging markets. There's been pressure, but in some ways it's been orderly. We haven't seen the shock and awe, for example, through a real dive in Treasury yields and a full flight to quality.
4. What's your view on the Fed?
The market's priced for maybe 2.5 interest-rate hikes in the US over the next 12 months. We think the most important metric is going to be financial asset prices - as long as they remain stable, the Fed is emboldened to keep lifting rates.