Emerging Markets Rout Nearing a Turning Point

Franklin Templeton Investments says the rout in emerging markets may be nearing a bottom though there are still countries like the Philippines that will suffer.

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, Bloomberg reported.

 “We are trying not to make the big dollar decision at the moment because we feel like it could pop either way,” Siniakov said in an interview 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% 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 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 show.

It could go either way, 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 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.