NEW YORK (Reuters) - Some of 2017’s top-performing emerging market fund managers are reshuffling their currency holdings, paring back bets on some of the asset class’ big names and shifting to more exotic currencies like the Czech koruna, Uruguayan peso and the Egyptian pound.
The dollar’s bounceback in September, including its best week of the year to close the month, has not changed managers’ underlying bearishness on the currency. The shift represents a sense that the greenback’s remarkable slide against rivals like the Mexican peso and Brazilian real may stall - the dollar bounced to a three-month high versus the peso on Thursday - while other currencies are due for a rally.
Fund managers’ embrace of these lesser known and less liquid currencies is a sign that even within emerging markets, long considered an exotic and volatile area to begin with, investors are pushing out their risk profile. That could represent either a savvy wager or irrational exuberance.
Data from research firm eVestment shows that local currency bond and outright currency exposure to Uruguay more than doubled from the second quarter of 2016 to the second quarter of 2017, long positions in the Czech Republic’s local currency bonds have surged to 44.9 percent from 11.4 percent during that period and the proportion of investors with currency exposure to the Czech koruna has soared to 68.0 percent from 12.7 percent.
Investors with currency exposure to Egypt have grown from 2.53 percent in the second quarter of 2016 to 45.3 percent in the same quarter this year.
EVestment tracks the number of investors in its emerging markets local currency universe who report they own the bonds or have long exposure to the currency of the specified country.
Fund managers who spoke to Reuters described a range of investment instruments including currency forwards, local currency bonds and some government T-bills.
Leah Traub, partner and portfolio manager at Lord Abbett, said her emerging market funds have recently entered positions, “into some off-market names” or currencies outside the JP Morgan emerging market diversified global bond index that she uses as a benchmark, including Uruguay, Egypt and India.
Her funds have rotated some exposure out of currencies correlated to the euro in emerging Europe, such as Hungary and Poland, and Traub said she is looking for emerging market currencies with lower levels of correlation to developed market currencies.
“If there was any theme to it it’s just that the much better global backdrop allows some of these more idiosyncratic stories to really unfold,” she said in a phone interview last week.
Andy Keirle, who manages T Rowe Price’s EM local currency bond fund, has also added positions in Egypt as well as the Sri Lankan rupee. At the same time, he reduced a long position in the Mexican peso he took ahead of the U.S. election.
Egypt has been favoured by investors following the country’s decision to float its currency, adopt a value-added tax and cut energy subsidies as part of a loan package from the International Monetary Fund. The IMF has called Egypt’s reforms “bold” and said the North African nation is “gathering strength” as the fund prepares to issue a $12 billion loan, its third tranche in the package.
Jean-Dominique Bütikofer, Voya Investment Management’s head of emerging markets fixed income, said he is now looking for relative value trades, such as taking long positions on the Turkish lira against the South African rand.
“When it comes to the market cycle, we don’t expect the market to sell off, but we have peaked,” Bütikofer said. “You can stay at a high level and you can plateau for a long time. The beauty of fixed income, including local currency and local rates, is you have a decent coupon. So going defensive too early might cost you a lot of money.”
Bütikofer and others said they will be closely watching next week’s IMF/World Bank meeting in Washington for clues about the next potential catalyst for global fund flows.
While fund managers are diversifying - and some said they are taking a bit of risk off the table after a profitable 2017 so far - none of the 13 interviewed said they expect to see emerging market currencies bull run come to an end soon.
“Historically since the 1970s, dollar cycles have travelled in multi-year paths, so it wouldn’t be surprising to be in a three-year, four-year cycle,” said Jim Barrineau, portfolio manager and head of emerging markets debt for Schroders.
The dollar index .DXY, which tracks the greenback against six major currency rivals, has sunk from a high of 103.82 on Jan. 2 to a 2017 low of 91.15. But the index had been as low as 79.52 as recently as 2014.
“It’s hardly been a collapse of the dollar,” Barrineau said. “Arguably, if history is any guide, we have more to go.”
(To view graphic on EM's new, more exotic currency frontier click - tmsnrt.rs/2xjwqz0)
Reporting by Dion Rabouin; Editing by Christian Plumb and Matthew Lewis