The passive, fully funded currency indexes provided to EuromoneyFXNews, show that emerging markets currencies produced negative returns in August, as investors sought out safe havens such as the Swiss franc, yen and even the US dollar. The best performing index was the CEEME index, which lost 0.93%. The worst performer was the Brics index, which includes the South African rand, with a return of –2.45%. Meanwhile the DXY dollar index performed in reverse, returning 0.32% in August, though its year-to-date returns are negative at –6.06%.
Conversely, the MSCI EM equity index lost more than 9% in August, which gave it a year-to-date return of –7.67%. The Dow Jones Industrial Average index lost 4.36% in August, while year-to-date, it remains marginally in positive territory. Year-to-date returns for all of the currency indexes remained in positive territory, with the Bric index yielding a return of 5.88%. The CEEME index was next best with a return of 5.53%.
While the DJIA indicates an annualized return of 8.65%, its risk level, or volatility, is running at 15.5%. The Bric index (Brics*2), which has similar volatility, provides an annualized rate of return of 17%. This can be summed up by the Sharpe ratio, which calculates the reward versus the risk taken, which explains why ratios on currencies are higher than on equity indexes.
To illustrate the Sharpe ratio in an emerging markets context, consider an investment in an unleveraged basket of EM currencies (EM Top 10 by GDP), which has a volatility level of 8.3%, and an annualized return of 11%, versus an investment in the MSCI EM World equity index, with a volatility level of almost 24%, that produces an annualized return of 12.93%. Therefore, the investor is effectively taking three times the risk of the currency basket, to achieve an additional 4.5% return. To be sure, there would be a degree slippage in FX costs that would reduce the return in the real world, but it shows how return dynamics vary between equity and currency markets.
| Currency Index Returns |
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| Source: Independent index providers |