It was interesting to compare the recommendations of two Euromoney panel discussions on Wednesday, “Emerging Markets: Selecting the Winning Currencies” and “Themes and Forecasts for 2010/11 and the Reasons Behind the Forecasts”.
Both panels had an outspoken maverick, respectively Liam Halligan, chief economist at Prosperity Capital Management, and Gabriel Stein, chief economist at Lombard Street Research. In fact it would have been fun to have had them on the same panel – witness their respective takes on Russia: Halligan: “With growth of 724% over the last 10 years, it [Russian equities] is the top performing market in the world, the earnings growth is staggering yet the market still only trades at eight times earnings”, versus Stern: “It is still a gangster-state... stay away from it, full stop.”
On the first panel, Halligan opened by making the point that with a growing proportion of global GDP, 75% of the world’s FX reserves, 75% of the world’s population but fewer age-related liabilities: “why would anyone under-50 not be massively over-weight emerging markets?” Just about every emerging market currency was mentioned in the discussion but the recommendations were largely as one had expected – Brazil, Russia, India, China – while Poland, Egypt and Israel (long the shekel was recommended during the second panel) had their advocates.
The second panel understandably spent much time discussing the euro – the inevitability of a change in ECB policy to allow the purchase of sovereign debt was mooted more than once, together with the thought that while it might save the EU it would be severely negative for the EUR. Everyone was bearish and suggested potential end-of-year targets of 1.2000, 1.1500 and even 1.1100. While Sterling was also discussed – everyone bearish again, mentioning potential end-of-year targets of 1.4000 and 1.3000 – the nuggets came in the winding up. One of the panellists pointed out that the strongest Asian currency since the launch of the euro in 1999 is... CNY. From that, a conclusion was drawn that, with Asian currencies currently 4% below their long-term average since 1999, a long Asia basket and short euro position should be considered. A position that makes sense when ageing populations in the West and the debt burden are factored in.
In summary, a recipe that I took from a combination of the panels was: (1) sell the USD, GBP, EUR, and buy a basket of emerging market Asian currencies; (2) let it all run for 10 years; and (3) retire to a private island.