March 24, 2011 "Asian currencies to appreciate this year"
SINGAPORE: Emerging economies in Asia have seen their currencies appreciate this year on strong economic growth, a trend that analysts say is likely to continue.
To cope with extremely high levels of inflation in Asia, investors are expecting Asian banks to raise interest rates - a move that may attract more debt capital, leading to appreciation in the region's currencies.
"Because the gap between U.S or Europe or Japanese interest rates is quite high so that carry trade will be one factor, which will motivate investors to invest in Asia," says Mr Rajeev De Mello, head of Asian investment at Western Asset Management.
In the last two years, the Chinese yuan has appreciated 4 per cent against the greenback.
Most other Asian currencies have posted double-digit gains, with the Indonesian Rupiah gaining 31 per cent; Malaysian Ringgit 20 per cent, Thai Baht 17 per cent, and Indian Rupee 13 per cent.
Analysts expect currencies of emerging market economies to rise further as they play an increasingly larger role in global trade.
"The whole of emerging generating growth themselves. They are becoming a much more important part of global trade and naturally that will lead to their currencies revaluing," says Mr Allan Conway, head of emerging markets, Schroders.
When it comes to investing in emerging markets, most analysts say that they prefer equities to bonds.
Mr Conway says, "There has been no-rerating of emerging equities today, they are on a prospective PE of about 11 times, emerging debt has undergone a massive re-rating, you have gone from spreads from a thousand to below 300.
"emerging equities have not been re-priced, they are still at a discount to the developed markets and they are still cheaper than their own history. So emerging equities look much better than emerging debt".
However, fixed-income fund managers say that the outlook for emerging-market debt may not be bad, especially longer-dated bonds; which respond more to inflation than changes in policy interest rates.
Analysts say investors in these bonds may benefit when central banks emerge victorious in their fight against inflation.
http://www.channelnewsasia.com/stories/economicnews/view/1118646/1/.html
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