Emerging-market currencies pose dangers for investors, says Jen
Fast-growing emerging markets such as Brazil and Turkey and their currencies could pose dangers for investors because of a lack of market infrastructure, according to Stephen Jen, a managing partner at hedge fund SLJ Macro Partners.
Investors should look beyond the speed of economic growth in these markets and consider issues such as governance, liquidity and a particular currency’s ability to absorb shocks, Jen told delegates at the FX Investment World conference in London today (Wednesday).
“Emerging-market economies are like cars,” Jen said. “While it might be exciting to get from 0 to 60 miles per hour in three seconds, you should also consider handling, control and comfort.”
China, which is not in a position to manage its own monetary policy, was an example of a fast-growing economy where “handling”, for instance, was lacking, he said.
If a negative rare event hit, an emerging market was more likely to suffer a run on the currency because of a relative lack of infrastructure and stability, compared with developed economies, Jen told the conference.
Another issue was that emerging markets hold some $5.5 trillion of the total $9 trillion of global currency reserves today, he added.
“Emerging markets suffer from negative carry in their currency reserves,” Jen said. “There is a cost to that.” Moreover, inflation was likely to be a growing issue for emerging-market economies over the next decade, fuelled in particular by higher wages, he added.