House dismisses rate hike fears for EM currencies
Standard Life Investment’s (SLI) Richard House has dismissed anxiety over a US interest rate hike affecting emerging market currencies, with the manager believing the move has already been priced in.
Concerns have risen over how hard a US interest rate rise will hit emerging markets, especially now consensus has it pencilled in for December.
Many see a rate hike in the US hitting emerging markets hard as capital flows back towards the US, pumping up the value of the dollar, thus hitting emerging market currencies. Soft emerging market currencies have been affected by the strengthening dollar, as many anticipate the 2015 increase.
But Mr House, manager of the £180m SLI Emerging Market Debt fund, is not overly concerned.
“I am much more sanguine about it given it has been priced in. The US Federal Reserve has done a decent job of flagging it up.”
However, what happens next in China is more of a worry to Mr House. “It has ramifications for every market, not just emerging markets,” he said.
While believing the market has priced in further currency disruption, Mr House said recent lacklustre performance among emerging markets was down to soft currencies.
As an asset class, emerging market debt has not been covered in glory in recent times with the typical Investment Association-listed fund delivering an average loss of 9 per cent in the past three years to 11 November.
However Mr House’s portfolio, which just marked its three-year anniversary last month, has achieved a total return of 6.4 per cent in sterling terms for the period, according to data from FE Analytics.
Looking at the state of play in the sector, he said the drop off in performance was typically the result of one factor. “Most bad performance has been down to local currency, but hard currency, where we have been investing, has done pretty well,” he added.
Within his universe of circa 65 countries – he currently has investments in 32 – around 95 per cent “are in decent shape”, with the exceptions being the likes of Argentina, Venezuela, Egypt and Ukraine, all of which generally have solvency issues.
Looking to the latter nation, the fund manager noted that while the troubled country has previously ruled out help from crisis lender the International Monetary Fund (IMF), the “recent and tragic events may force the government’s hand to reconsider”, given that Russians account for around a third of its tourists.
Mr House also dipped back into Croatia following the country’s recent elections in the hope its new government will introduce better reforms. Its first election since joining the European Union in 2013 looks likely to return a centre-right coalition.
The HDZ claimed 59 seats while the ruling alliance, headed up by the Social Democrats, gained 56. But both parties lack the 76 required for a parliamentary majority. However, during the campaign a kingmaker has emerged in a third party, Most, which took 19 seats.
Mr House said: “Croatia has had its issues including a lack of growth and a large fiscal deficit. But the Most party is very reform-minded and it could make the country more investable.”
After shunning the country for some time, the manager has allocated 3 per cent to Croatia and said he may top this up “but not before a coalition is formed”.
