Managed currencies attract money, the Michael Shearin Group Morgan Stanley

Managed currencies attract money, the
Michael Shearin Group Morgan Stanley
Managed currencies attract money to frontier markets
Frontier markets with managed exchange rates from Dubai to Vietnam are luring
equity investors fleeing the currency turmoil in larger developing economies.
Funds that buy shares in the less-developed nations posted inflows of $407 million
in the first six weeks of 2014, while $21 billion was pulled from emerging markets,
EPFR Global data show. A gain of about 3 percent in the MSCI Frontier Market
Index this year pushed stocks to a 2008 high Feb. 19, even as slower China growth
and the Federal Reserve’s plan to trim bond buying weighed on developing and
developed-nation gauges.
Benchmark stock indexes in the United Arab Emirates, Qatar and Vietnam, whose
central banks control local currencies, are among the 10 best performers this year
within global equity gauges tracked by Bloomberg. While investors dump
emerging- market currencies including the Turkish lira, Hungary’s forint and
Brazil’s real, bourses in those nations languished with the world’s worst
performers in 2014.
“Half of MSCI frontier have effectively fixed exchange rates to the dollar,”
Charles Robertson, London-based global chief economist at Renaissance Capital,
said by e-mail on Feb. 17. Strong economic growth also heightened interest, he
said.
A currency rout triggered by political instability from Ukraine to Turkey and the
fallout from the Fed’s tapering plan cut into equity returns. A Bloomberg gauge
tracking 20 developing-nation currencies and the MSCI Emerging Markets Index
are down 1.7 percent and 4.3 percent respectively in 2014.
Equities in Qatar, the world’s largest exporter of liquefied natural gas, have rallied
14 percent this year, while Abu Dhabi’s gauge has gained 15 percent and Dubai’s
benchmark posted returns of 24 percent, the most among 50 of the world’s largest

equity markets. The Persian Gulf countries keep their currencies pegged to the
dollar because earnings from energy exports are denominated in the U.S. currency.
Shares in Dubai are benefiting from an economic recovery as the regional business
hub gears up to host the World Expo in 2020 with $8 billion of infrastructure
spending. The event, which traces its roots to London’s Great Exhibition of 1851,
gave Paris its Eiffel Tower in 1889 and drew 73 million visitors to Shanghai in
2010. Qatar’s government forecasts a current- account surplus of about 23 percent
of gross domestic product this year and growth of 4.6 percent.
Persian Gulf “markets enjoy a current account surplus and have never relied on
global financing,” Rami Sidani, the Dubai- based head of Middle East and North
Africa investments at Schroder Investment Management Ltd., said by e-mail on
Feb. 18. “Their dollar-based economies mean that they do not present any currency
risk.”
Fixed exchange rates have also helped spur a rally in Tunisian and Vietnamese
shares this year, Sidani said.
Managed exchange rates in countries with less financial prowess to defend them
have posed risks to the dollar- denominated returns of investors as countries from
Argentina to Kazakhstan scale back support for their currencies.