H2 Currencies to Watch: Growth Potential in Emerging Markets

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This is the last article in our blog series on what businesses need to know about key global currencies in the second half of 2018. Sign up for our weekly FX newsletter to get these articles sent straight to your inbox.

Read on as we look at commodity prices, interest rate policies, and the economic growth of emerging markets. Here's what businesses can expect in the upcoming months.


The watchword for emerging market currencies in the first half of 2018 was “turbulence," as volatility in developed markets like the U.S. and Germany triggered a downward spiral for emerging market investments and currencies. iShares MSCI Emerging Markets ETF was down by 6.2% for the year, as of late July, as a strong U.S. dollar is overmatching emerging market currencies so far in 2018.

The upside? Foreign currency experts say the second half of the year should yield better results for emerging markets, as global economic volatility abates and the U.S. economy—and the dollar—lose some steam in the long run. 

     Emerging markets are
     expected to grow more than
     2x as fast as developed
     markets in 2018 and 2019.

“Emerging markets earnings growth expectations for 2018 remain steady at 18% and estimates for 2019 were revised slightly higher to 11%," noted Lazard Asset Management in a recent report. “Dividend yields and free cash flow yields remain higher in emerging markets compared to developed markets, while developed markets return on equity has moved slightly higher than emerging markets, at 12.3% versus 12.2%."

Emerging markets are also expected to grow more than twice as fast as developed markets in 2018 and 2019 at 5% versus 2.3%, respectively, Lazard predicts.

Key emerging market economies in Turkey, the Philippines, Poland, Indonesia, Brazil, and South Africa should rebound from a weak first half of 2018 and join smaller but more economically robust emerging market countries like Colombia, Peru, Qatar, the Czech Republic, and Egypt to boost emerging markets for the rest of 2018, the investment firm reported.

Another trend to watch is how ongoing tariff battles triggered by the U.S. will impact foreign currencies in emerging markets. Exhibit “A” is Turkey, where the lira fell more than 20% in value in early August after the Trump administration doubled tariffs on aluminum and steel on Turkish metal imports.

Businesses affected by these emerging markets should keep up with upcoming economic events.

A Strong U.S. Dollar Hampering Emerging Markets

A sturdy U.S. dollar worked against emerging market currencies in the first half of the year, as the buck was buoyed by a tax-reform bill that triggered consumer and business spending and led the Federal Reserve to further tighten U.S. interest rates. That trend should dissipate as other emerging markets, especially in Europe and Asia, tighten their own interest rates and reformulate their economic policies, as economic conditions improve in their countries.

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In such an environment, emerging market currencies should become more competitive, after countries like Argentina, India, and Turkey start practicing some fiscal discipline of their own in the first half of 2018, as real rates continue to rise as the year rolls on.

“Despite the possibility of further consolidation in the near term, we believe emerging markets equity and debt valuations currently provide an attractive entry point and a good cushion against any further volatility, with emerging markets fundamentals intact in the medium term," Lazard stated in its report.

Upside for Emerging Markets in 2018 and 2019

While emerging market currencies have taken a back seat to the U.S. dollar, performance-wise, other indicators point to a pick-up for the rest of 2018, particularly as global economic growth and commodity price gains in emerging countries begin take hold.

These three global economic issues should work out in favor of emerging market currencies:

Growth and trade gains: Global economic growth should favor emerging market currencies that are “growth sensitive"—think countries like Czechoslovakia, Poland, Brazil, and Turkey. As global trade scenarios see an uptick, “trade sensitive" countries like Mexico, Singapore, South Korea, and Taiwan should see economic conditions improve, which would boost local currencies.

Commodities rising: Additionally, emerging market countries that export oil, gas, or metals -- this includes countries like Russia, Chile, and Brazil - should benefit from rising commodity prices.

Tightening up rates: A growing number of emerging market countries are steering away from monetary easing cycles and are looking to tighten up on rates as their economic picture improves. Countries like India, China, South Korea, Brazil, Chile, and select Eastern European countries like Czechoslovakia, are drawing closer to the end of their accommodative interest rate easing policies, which should help emerging market currencies to be more resilient against the swaggering U.S. dollar.

The Takeaway

Absent a major geopolitical event, like war between South and North Korea, economic experts expect emerging markets to rebound after underperforming in the first six months of 2018. That's especially the case in Asia, where regional economies should benefit from their close proximity to China and its resilient economy.

That doesn't mean risks will recede, but key economic factors like trade, commodity prices, and stronger gross domestic product performance in a growing number of emerging market countries should make emerging market currencies more competitive against the dollar.


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