While the euro has risen by as much as 40% against the dollar since 2002, emerging market currencies have only seen gains of 17%.
Well, yes and no.
An article out this morning by the Financial Times examines this disparity.
The FT says, "Fear is part of the answer. Investors haven't forgotten the emerging market currency devaluations of the 1990s and early 2000s. For them it's 'no thanks, too risky.'"
Investors already hold emerging market equities in their portfolios, and according to the FT, investors might feel that these equity positions suffice for currency exposure.
For various technical reasons, currency appreciation is now being looked at by emerging country governments and central banks as a way to battle inflation. The article cites that last April, the Reserve Bank of India allowed the rupee to appreciate, to aid its inflation-fighting efforts, and since then, the currency has strengthened by 14 percent.
How best to play these emerging market currencies?
The article suggests buying foreign bonds – bonds issued in local currencies by emerging market issuers. Doing this does two things for investors:
- By owning local debt, investors get currency exposure;
- In a rising currency situation, the price of the bonds should also rise, all things being equal.
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