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Emerging Market Currencies Have Tailwinds

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Even with a spate of interest rate cuts throughout the developing world in 2012, investors embraced bonds denominated in emerging markets currencies.

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Editor's Note: This content was originally published on Benzinga.com by The ETF Professor, Benzinga Staff Writer.

Even with a spate of interest rate cuts throughout the developing world in 2012, investors embraced bonds denominated in emerging markets currencies. Despite slack performances by major emerging markets currencies such as the Brazilian real and the South African rand, 2012 was a sturdy year for developing world currencies, a trend that could continue this year in the eyes of one portfolio manager.

With the stage set for 2013 to be another year full of monetary easing by developed world central banks, emerging markets currencies have tailwinds behind them, according to WisdomTree Portfolio Manager Rick Harper.

"We believe 2013 will be another year of developed market central bank activism that could provide positive tailwinds for EM currency investors," said Harper in a research note. "After a quick turnaround in risk sentiment in the first few weeks of 2013, investors have done well by having exposure to most emerging market currencies to start the calendar year."

Previously highlighted by Harper as an avenue for investors to participate in fast-growing Asian economies, the WisdomTree Asia Local Debt ETF (NYSEARCA:ALD) is up about half a percent to start 2013.

ALD is a combination of developed and emerging markets as Australian and New Zealand issues are mixed with bonds denominated in the local currencies of South Korea, Malaysia, Indonesia, Philippines, Thailand, India, China, Hong Kong, Singapore, and Taiwan. Faster GDP growth could bolster Asian currencies this year, according to Harper.

"Historically, Asian currencies have been less volatile than their Latin American or European counterparts," he said in the note. "In uncertain market environments, this has been a benefit for investors. Many economists predict that Asian economies ex-Japan will grow at faster rates in 2013 than Latin America or Europe. Faster growth rates and increased economic output could provide a boost for their currencies in 2013."

Coming off two consecutive years of significant losses against the US dollar, the Brazilian real could bounce back against the greenback if Latin America's largest economy posts better-than-expected growth figures. However, an improving US economy and rallying equity markets here could continue to add to the bull case for Mexican bonds.

"In Latin America, another currency poised to continue its upward trend in 2013 could be the Mexican peso," said Harper. "In an environment where the US economy continues to grow at faster rates than developed economies in Europe, Mexico could continue to be a net beneficiary."

ETFs with significant exposure to Mexican debt include the Market Vectors LatAm Aggregate Bond ETF (NYSEARCA:BONO) and the SPDR Barclays Emerging Markets Local Bond ETF (NYSEARCA:EBND). Investors looking for a direct play on the peso itself via an ETF should consider the WisdomTree Emerging Currency Fund (NYSEARCA:CEW).

CEW is nearly an equal weight product as it offers exposure to 15 emerging market currencies with weights ranging from 6.45% for the South African rand to 6.86% for the Russian ruble. Mexico's peso accounts for 6.75% of CEW's weight.

CEW has only posted a modest 0.09% year-to-date gain, but if developing world central banks eschew Bank of Japan, Federal Reserve-style easing this year, the fund could offer upside to investors.

"With EM central banks largely on hold, the absence of stimulus from them could remove a potential cause of currency weakness that dampened returns in 2012," noted Harper. "For investors that are still underexposed to international currency and fixed income, 2013 could prove to be a great year for gaining exposure to faster-growing economies around the world."

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No positions in stocks mentioned.

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