“Suddenly, all mention of currency wars has faded to the background,” says FXPro.com. Until recently, emerging economies were fighting to keep their currencies low in order to give exports a boost. In Brazil, where the real appreciated by 11% against the US dollar in the year to August, squeezing exporters, the government fought back by imposing taxes on foreign purchases of local assets.
Now “the invasion of foreign capital…has turned into a shambolic retreat”, says The Economist. As global investors rattled by the prospect of a messy euro break-up and another economic downturn have fled risky assets and headed for traditional safe havens, emerging-market currencies have slid sharply. The real fell by 15% against the greenback in September; the Korean won by around 10% to a 13-month low. Korea and Brazil have recently intervened to temper the slide in their currencies.
So emerging markets have won the currency war, says The Economist. But it’s a pretty hollow victory. Their cheaper currencies will help them win a bigger share of global spending, “but that is small consolation as global spending declines”, which it is set to do as the developed world slows.
The bigger issue here, however, is that emerging asset markets, far from being safe havens – as some have suggested – can’t decouple from global sentiment. Emerging equities have been falling for some time, but now the currencies are sliding and local currency debt has “taken a sickening downward lurch”, as the FT’s John Plender puts it. With global macro uncertainty still high, “we think investors are unlikely to see the… sell-off as an opportunity to buy”.
They certainly shouldn’t, says the investment bank UBS. The correlation between emerging markets and global growth “is at an all-time high… 80% of moves in [emerging-market stocks] are due to non-emerging-market factors”. Emerging-market equities may be historically extremely cheap on a forward price/earnings ratio of nine; but the danger of further near-term falls is high since the main global worry, the euro crisis, is far from being resolved. Until it looks as though this might be rectified, emerging-market assets of all kinds look too risky.