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More upbeat tone on EM currencies, but opinions vary on best picks

Emerging markets have regained some of the buoyancy lost during the early months of the coronavirus crisis, but analyst opinions hint at the difficulty of identifying which EM currencies investors should favour.

A Covid-concept Brazilian real banknote. Photo: iStock

HSBC’s latest emerging markets (EMs) sentiment survey, published in January, suggested that investors became much more upbeat on EM currencies in the last quarter of 2020.

Various factors have contributed to this tilt towards long exposures, including higher commodity prices and improving economic activity globally.

However, while positive sentiment towards EM currencies is justified in the medium term, this is not necessarily the case in the near future due to a lack of visibility around vaccination programmes, not only in Latin America but also across Asia, suggests Daniel Tenengauzer, BNY Mellon Markets’ head of markets strategy.

Our long-term valuation models still point to EM FX being cheap against external drivers
Christian Wietoska, Deutsche Bank

While Deutsche Bank remains broadly constructive on EM currencies during 2021, it is turning tactically more cautious and expects the first quarter to be characterized by a higher degree of differentiation among currencies than the final three months of 2020, says Christian Wietoska, the head of the bank’s CEEMEA research team.

“Our long-term valuation models still point to EM FX being cheap against external drivers, but there is a valid question of whether these relationships have broken down in the short term,” he explains.