Five reasons EM currencies may be a buy

EM CURRENCIES

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.

Increased risk aversion and rising pessimism about the global economy drove investors to cut positions, and the lack of market depth exacerbated falls in emerging currencies. Have exchange rates now moved far enough to be a clear buy? From a longer-term standpoint we think the answer is yes because the structural arguments for medium-term emerging currency outperformance are compelling. They are as follows: 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 rel...