Stopford: Five reasons EM currencies may be a ‘buy'

Emerging market currencies fell sharply during September after holding up pretty well through August. Developing market exchange rates even lost ground against the euro, despite Europe being the focus of market fears.

Have exchange rates now moved far enough to be a clear buy? From a longer-term standpoint we think the answer is yes: 1) Exchange rates are undervalued by about 15% on average using our preferred measure of purchasing power parity. This valuation discount should gradually unwind over time. The relative cheapness of emerging currencies is underlined by strong balance of payment positions in most cases. 2) Stronger economic growth should also support higher real exchange rates over time. The so-called Balassa-Samuelson effect suggests that emerging currencies will trend higher thanks to...