Fund manager MFS has warned that emerging markets could struggle to make progress against the US dollar this year, following a recent sell-off.
MFS institutional fixed income portfolio manager, Robert Hall, said the sell-off was due to confluence of negative country-level developments, and that currency adjustments should help address macro-economic imbalances. Hall said the emerging market falls so far should be seen as a controlled burn, creating conditions for future growth, rather than an out-of-control wildfire. But he added a controlled burn can still do damage and some EM currencies, such as the Mexican peso, have become risk proxies and have suffered despite sound fundamentals.
Hall added that Argentina, Venezuela and Ukraine have all hit crisis point at the same time, while the “fragile five” – Turkey, South Africa, Brazil, Indonesia and India – all share current account deficits. Consequently Hall said: “The sell-off looks more idiosyncratic than systemic, so there is probably no cause for panic. In particular, we do not expect to see a repeat of 1997 – the last real EM contagion crisis – because today’s fundamentals are much stronger.”