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EM new equilibrium not too far away – TDS

FXStreet (Córdoba) - According to Cristian Maggio, Head of Emerging Markets Strategy at TD Securities, most Emerging markets have rebalanced throughout 2015 with a sharp drop in equity valuations and their currencies, “if you remove the tail risks, we may find out that the new equilibrium is not too far away. In fact, I believe several markets are already trading cheap to their fair value.”

Key Quotes:

“Risk premium must be higher to attract or retain flows, and until it gets to the proper equilibrium, the allure of EMs remains clinically dead. But most EMs have rebalanced throughout 2015 with upside rate corrections, a sharp drop in equity valuations and similarly large depreciation of their currencies. If you remove the tail risks, we may find out that the new equilibrium is not too far away. In fact, I believe several markets are already trading cheap to their fair value.”

“I’m not advocating that EMs are wonderland, because they are not. I’m not even saying that the asset class rewards an investor properly for the risks taken – some assets do, others don’t. But until we rid of the psychological cage that makes markets trade one way only, we cannot seriously talk of valuations, risks and opportunities.”

“The underdogs are BRL, COP, RUB, TRY, ZAR and MYR. Not surprisingly, each of these currencies has suffered from very acute idiosyncratic problems that exacerbated the general negative sentiment. On the other hand, CEE currencies have performed exactly in line with the EUR, which continues to make them the best candidate for low-risk prone EM investors during periods of heightened volatility.”

“So in conclusion, if markets can convincingly exit the ultra-bearish summer momentum, we may see the underdogs becoming the stars for a while, and the stars taking more of the brunt of the correction. Does this mean that the likes of Brazil, Turkey and South Africa are all of sudden attractive investments and we have changed our minds on them? No dammit! But worth exploiting the opportunity of a rebound from overly depressed levels even there.”

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