Catch-Up Potential For EM Currencies

Neuberger Berman profile picture
Neuberger Berman


  • As the Emerging Markets Debt team gathered at the recent World Bank/IMF annual meetings, the mood was cautious but much improved from 12 months ago.
  • The team anticipates growth improvements across all emerging regions, and among both frontier and advanced countries, in 2020.
  • While hard currency spreads could tighten further, local currency bonds are more likely to outperform in an environment of improving growth and rising yields.
  • Local currency yields are low, however, and so the focus is on emerging markets foreign exchange (FX), where valuations remain attractive.


As growth bottoms out and tail risks ease, attractive valuations support the case for emerging markets currencies.

This edition of CIO Weekly Perspectives comes from guest contributors Rob Drijkoningen and Vera Kartseva of Neuberger Berman’s Emerging Markets Debt team.

In mid-October, the Neuberger Berman Emerging Markets Debt team held its off-site gathering in Washington, D.C., on the heels of the annual meetings of the Board of Governors of the World Bank Group and the International Monetary Fund.

The general feel from World Bank/IMF sessions was one of caution but not great anxiety. Supply chains and capex plans have adjusted as everyone braces for the impact of the global growth slowdown and trade tensions. Central banks and consumers could cushion the downside and help avoid a near-term recession in the U.S. These dynamics were reflected in the IMF’s growth forecasts, which saw downgrades across the board for 2019, but modest upside potential for next year.

Modest Upside Potential for Emerging Markets Growth

Our own outlook, based on a GDP-weighted aggregation of 80 detailed, country-by-country forecasts, is for growth in emerging markets ex-China to increase from 2.8% to 3.2% next year. We anticipate improvement across a wide set of countries in all regions, including both frontier and more advanced economies.

Among larger economies, we believe growth in Brazil will increase from 0.9% to 2.0%, in Mexico from 0.5% to 1.3%, in Russia from 1.4% to 1.9%, in Turkey from -0.1% to 2.1%, in South Africa from 0.7% to 1.3% and in India from 6.5% to 6.6%. Countries in Central and Eastern Europe are likely to see growth decline from today’s relatively elevated levels, due to delayed effects from the slowdown in Germany—but even here, strong local consumption has made economies strikingly resilient.


Along with these improved individual country outlooks, we also note some bottoming out in factors that contributed to the recent growth slowdown, such as the lagged effects of monetary policy tightening in U.S. and China, and the dwindling of inventories built up because of earlier, unrealized strong growth expectations.

It was encouraging to see new orders increasing and finished goods inventories declining in the JPMorgan Global Manufacturing Purchasing Managers’ Index (PMI) for October, as well as a substantial de-escalation in the U.S.-China trade war, which will likely improve the outlook and raise confidence.

Central banks are doing their part. Global monetary policy is now arguably as accommodating as at any point since the financial crisis. In February of this year, we were looking at nine months of hikes and no cuts by the world’s 37 central banks. Today, around 15 could cut rates and almost none are set to hike.

Given historical patterns, this easing of financial conditions should soon start to show up in macroeconomic data—we may already be seeing it in the better-than-expected third-quarter GDP data out of Europe and Global Manufacturing PMI. In Asia—which slowed down first and should therefore be expected to lead the recovery—industrial production improved in China, Korea and Japan in September, while October PMIs suggest a stronger fourth quarter.

The Case for Emerging Markets FX

A modest upturn in global growth would strengthen the case for local currency versus hard currency emerging markets debt.

While we still think hard currency spreads are likely to tighten, especially among higher yielders, its seven-year duration usually causes underperformance relative to local currency bonds when growth and yields are rising. Having said that, local bond markets are somewhat crowded and yields there are at historically low levels, which complicates the case for local currency duration. We therefore favor emerging markets foreign exchange exposure and duration only in higher-yielding countries.

Except for a brief respite in 2017, emerging markets currencies have been out of favor since 2013. Investors’ positioning in emerging markets FX is low compared with other asset classes. Fundamental exchange rate models, which take into account metrics such as current account and terms of trade, now suggest that the majority are trading cheaply. Improvements in country fundamentals, such as reforms in Brazil or restrained fiscal and monetary policies in Russia, have also helped to improve valuations.

Recent developments do not mean growth is certain to improve. Among other things, we are closely watching whether the consumer can keep the U.S. away from recession, and an unexpected re-escalation of the trade war would definitely further dent weak global business sentiment.

With the modest rebound in growth under our central scenario, however, we are now moving to a more positive stance on emerging markets FX alongside our existing overweight in emerging markets credit.


This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. Investment decisions and the appropriateness of this material should be made based on an investor's individual objectives and circumstances and in consultation with his or her advisors. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. The firm, its employees and advisory accounts may hold positions of any companies discussed. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types.

This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.

This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit for the specific entities and jurisdictional limitations and restrictions.

The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC.

This article was written by

Neuberger Berman profile picture
Neuberger Berman, founded in 1939, is a private, independent, employee-owned investment manager. The firm manages a range of strategies—including equity, fixed income, quantitative and multi-asset class, private equity and hedge funds—on behalf of institutions, advisors and individual investors globally. With offices in 23 countries, Neuberger Berman’s team is more than 2,100 professionals. For five consecutive years, the company has been named first or second in Pensions & Investments Best Places to Work in Money Management survey (among those with 1,000 employees or more). Tenured, stable and long-term in focus, the firm has built a diverse team of individuals united in their commitment to delivering compelling investment results for our clients over the long term. That commitment includes active consideration of environmental, social and governance factors. The firm manages $323 billion in client assets as of March 31, 2019. For more information, please visit our website at important disclosures:  Contact Us: Advisor Solutions (877) 628-2583 RIA & Family Office (888) 556-9030

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Recommended For You


To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.