The Fund seeks to achieve total returns reflective of both money market rates in selected emerging market countries available to foreign investors and changes to the value of these currencies relative to the U.S. dollar. Since the Fund's investment objective has been adopted as a non-fundamental investment policy, the Fund's investment objective may be changed without a vote of shareholders.
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The Chinese yuan has fallen for the sixth day in a row and hit its lowest level in a year, with currency analyst Kenix Lai believing that the People's Bank of China has been engineering the fall, possibly to "change the perception of the one-way bet on yuan gains."
Lai says the PBOC may also be "introducing two-way volatility as it prepares the renminbi for a wider trading band." The PBOC said last week that it plans to expand the range in an "orderly" manner.
The yuan's direction has generally been upwards, but since touching a record high against the dollar in mid-January, the currency has dropped over 1%.
Today, the PBOC set the renminbi's daily reference rate at 6.1184 to the dollar. The yuan is allowed to trade 1% either side of the rate.
In order to draw the necessary capital to pull emerging markets out of their swoon, real interest rates have to go higher, says Citigroup. A near-doubling of the benchmark rate in Turkey last week only pulled one-year borrowing costs up to 3.6%, less than half the average in the thee years prior to 2008. The real yield in Mexico (EWW) is about zero. In South Africa, it's 1.4% vs. 2% over the past decade.
“When you have low real rates and try to finance your current-account deficits, it usually won’t work,” says Citi LatAm strategist Dirk Willer. “If the U.S. is repricing for higher rates, it’s very difficult for you to get away with lower rates. South Africa (EZA) and Turkey (TUR) are not safe yet.”
“International monetary cooperation has broken down,” says India central bank boss Raghuram Rajan, a day after the Fed boosted the size of its taper and made no mention of melting-down emerging markets. Rajan joined counterparts from Turkey and South Africa this week in boosting rates to try and stem the slide in their domestic currencies.
"The challenge is brought on by their own domestic policies," says former Fed Governor Randy Krosner. "It's unfair to say it's all the Fed's fault."
Back in his IMF days in 2011, Rajan authored a report calling for the formation of a committee composed of representatives from the major central banks who would report on the spillover consequences of their individual policies. Good luck with that one.
Emerging markets are getting a respite today amid a big rally in the West (of the West is rallying because of a respite in emerging markets).
The FOMC statement is "completely anodyne" from the U.S. point of view, says Citi's Steven Englander, but as far as emerging markets go it's "hasta la vista, baby." He notes the economic assessment was a hawkish surprise, with economic growth described as having "picked up" rather than "expanding at a moderate pace ... Look to the yen, Swiss franc, and euro to do well, [and] commodity currencies and emerging markets to do poorly."
The MSCI Emerging Markets Index (ETF: EEM) is off 22% from a peak set about three years ago, with the most recent slide coming as currencies tumble. Central banks have begun hiking rates to combat, with India overnight boosting its benchmark for the third time in six months and Turkey expected to take action today (an announcement is due at 5 ET). The South African central bank meets tomorrow, but a rate hike is not necessarily on the table.
As usual, the unwinding of an epic credit bubble in China and the effect on growth tops the list of fears. One trust product - the China Credit Trust - narrowly avoided default this week thanks to a mystery third-party rescue.
Buy the dip, says Ashmore head of research Jan Dehn. “There is some serious dumbing down going on in financial markets right now when it comes to EM. EM debt levels (especially external debt), EM’s general reliance on external markets, and EM’s reserve holdings have all improved beyond all recognition over the past 10 years.”
Loomis Sayles' Peter Marber: “Compared to 1998, emerging markets hold over $7T more in hard currency reserves to cushion themselves from market volatility. For most emerging markets, the problems today are nothing like the problems of the mid-1990s. Very few countries are near default, and those that may be are relatively small.”
The iShares Emerging Markets Index ETF (EEM) is off 1.3% in the premarket as investors rush out of emerging currencies. The Turkish lira plunged to a record low today, while Ukraine's hryvnia fell to a four-year low, and South Africa's Rand dove to its weakest since October 2008 following Argentina's decision to devalue the peso and a weak PMI report out of China yesterday.
“We continue to see the risks surrounding China’s macro trajectory as having a negative impact on EM,” says Morgan Stanley's Rashique Rahman. “As capital costs rise and investment slows, commodity prices should come under pressure, boding poorly for economies linked to China’s old growth model.”
Of Turkey from Rareview Macro's Neil Azous: "Their net foreign-exchange reserves are dwindling pretty fast. They’re definitely in the danger zone. If you’re a money manager, the responsible action is to take some measures to reduce risk.”
You could have made the same bear case against emerging markets 10 years ago and you would have missed a decade of outperformance, says Everest Capital chief Marko Dimitrijevic, rebutting Goldman's recommendation to cut holdings in the sector. "If you reduce or ignore emerging markets, you're going to miss on literally hundreds of companies that are great."
Overall, Dimitrijevic overall return estimates are just slightly higher than Goldman's, but the real alpha is to be made in specific sectors - education in Brazil, infrastructure in Mexico, retail, cement, oil and gas in Colombia, and consumer plays in Saudi Arabia.
Everest is most bullish on frontier markets, or, as Dimitrijevic calls them, "EM 2.0." "It's a secular opportunity that reminds us very much of what now-mainstream emerging markets were like 15 or 20 years ago."
Everest had a big year in 2013, gaining 41.2%. Its dedicated Frontier fund rose 28.8%.
Emerging markets may seem cheap, but now's not the time to boost holdings, says Goldman in a report titled: Emerging Markets: As The Tide Goes Out. Those with a "moderate" tolerance for risk should cut exposure by a third - from 9% to 6% - says the team.
The fast growth in EM from 2003-2007 was the result of a mix of economic circumstances not likely to be repeated, says Goldman. Instead, there's been a "seismic shift" in sentiment as returns were not as attractive as expected, growth rates were not as sustainable as imagined, and countries were not as stable as believed.
Amid concern about the effects of Fed tapering, if and when it happens, Indonesia's rupiah has fallen to its lowest level since March 2009 after the government sold $190M of dollar-denominated bonds, well short of the goal of $450M.
The USD-IDR is +0.4% at 11790 rupiahs.
"We expect to see the rupiah weakening, keeping in view the Fed-tapering risk," says currency strategist Andy Ji.
It's worth paying another 50 or 60 basis points in expenses for a good ETF product not tracking a vanilla index, says RiverFront Investment's Rod Smyth at a Barron's ETF roundtable. One favorite in emerging markets is PowerShares' FTSE RAFI Emerging Markets Portfolio (PXH) which tilts towards factors like book value and cash flow and offers bigger weighting to sectors like energy. Bullish on Japan, his pick is WisdomTree's Japan SmallCap Dividend Fund (DFJ). Another favorite is PowerShares' FTSE RAFI Developed Markets Ex-U.S. Portfolio (PXF).
India is partnering with other emerging market countries to plan a join intervention aimed at halting the rout in their currencies, reports Reuters, citing senior Indian finance ministry official Dipak Dasgupta.
"It's is going to happen in a matter of days rather than weeks ... Brazil and India can start the move," he says, without making clear exactly which countries are joining the effort.
Meanwhile, AMP Capital - Australia's 2nd largest money manager - tells the WSJ it's slashed its emerging markets exposure to "zero" as the Fed readies an end to its liquidity binge.
"Currencies have to go where the market wants them to go," says Marketfield Asset Management's Michael Shaoul, speaking about emerging markets. Central banks have been doing everything from hiking rates and selling dollars to imposing capital controls, but at some point they may need to step aside and let their currencies fall.
If so, writes Brendan Conway, cheap emerging markets stocks still aren't cheap enough. In today's action: EEM -2.3%, VWO -2.5%, DEM -2.1%.
Forex reserves have been falling at Asian banks as they have attempted - not so successfully - to bolster their weakening currencies, which have been suffering partly from the Fed's talk of tapering. Six out of the 10 banks with the largest holdings have cut their reserves this year.
The Bank of Indonesia's holdings have plunged a record 18% in 2013, while the rupiah has dropped 12%. The Reserve Bank of India's holdings have fallen 4% as the rupee has dropped 12%.
The trends threaten currencies that central banks bought as they looked to diversify their reserves beyond the U.S. dollar in past years, including the euro, the Swedish krona, the Norwegian krone, the South Korean won, and the Australian and Canadian dollars.
Fed policy makers have rejected calls to take the recent turmoil in emerging markets into account when deciding on when and how reduce the bank's QE program. The fallout from the prospective tapering was a hot topic of discussion at the Fed's Jackson Hole annual get together over the weekend.
"We only have a mandate to concern ourselves with the interest of the United States," Dennis Lockhart said.
"They were complaining about us easing too much," James Bullard said. "Now when we start to talk about taper they're complaining about too tight of a policy. They have an independent monetary policy and they have to use that to manage" their own economies.
Emerging-market currencies have continued to suffer losses following the release of the latest FOMC minutes yesterday, which provided little clarity about when the Fed might start tapering its QE program but left the market expecting that it will be next month.
Ten-year Treasury yields are +2 bps at 2.916%. The recent spike in U.S. debt yields has caused borrowing costs to rise globally, which, along with the rising dollar, has not been healthy for emerging markets with large current account deficits, such as India.
USD-INR is +0.5% at 65.045 Indian rupees, with the currency hitting a new low of 65.55 earlier.
USD-TRY +0.4% at 1.9861 Turkish lira, with the currency hitting a new low of 1.9886 earlier.