Investors’ favourite emerging markets currencies

Investors’ favourite currencies in emerging markets are the Indian rupee (INR), the Mexican peso (MXN) and the Russian ruble (RUB), a recent survey showed.

The survey was carried out between March 17 and March 23 by Bank of America Merrill Lynch among 54 panellists investing in emerging markets, with more than $205 billion in assets under management in total.

Of the participants, 48% were dedicated real money emerging markets investors, 46% were hedge funds and 6% were crossover investors.

The Polish zloty (PLN) and the Turkish lira (TRY) gained ground in investors’ preferences in March compared to February.

Investors' favourite emerging markets currencies

Investors’ favourite emerging markets currencies. Source: Bank of America Merrill Lynch.

Consistent with previous reports, the flows picture is deteriorating for emerging markets. Long-only investors reporting inflows into emerging markets from institutional investors fell to 56% this month from 65% in January.

The proportion of those reporting institutional outflows increased to 30% this month from 8%. The picture on the retail side looks similar, with inflows decelerating, while outflows increase modestly.

Apart from emerging markets foreign exchange, investors have also become more bullish on emerging markets sovereign debt.

Investors' favourite asset classes in EM

Investors’ favourite asset classes in emerging markets. Source: Bank of America Merrill Lynch.

Looking at which fixed income assets are likely to outperform, investors selected India and Russia. Bullish expectations for rates in Indonesia, Mexico and Brazil have declined the most month-on-month in March.

The Federal Reserve’s policy on interest rates is still the most important driver of asset prices, with 65% naming it as the main factor, the highest percentage response since September 2014.

The biggest risk for emerging markets this year will be a selloff in US Treasuries, followed by more appreciation of the US dollar and a hard landing in China, the survey revealed.

Around 85% of respondents saw 10-year US Treasury yields rising by the end of the year, with most expecting the yield to hover between 2.25% and 2.50%.

Around 87% of the investors surveyed expect the US dollar to appreciate, with over 40% of respondents saying the greenback could strengthen by more than 10%.

As for when the Federal Reserve will hike interest rates, nearly 55% of respondents believe this will happen in the third quarter of this year.