GO
Loading...

Panic over; buy EM currencies: HSBC

HSBC strategists believe that the re-pricing of emerging market (EM) currencies is now "sufficiently advanced" to offer an opportune moment to buy into them.

HSBC forecast that an EM currency rally would soon spread across all currencies as the asset class regains appeal. After this "initial phase," there will then be a differentiation between individual currencies, with HSBC favoring the Peruvian nuevo sol and Mexican peso over the Brazilian real.

The bank also prefers North Asia to South Asia and the Polish zloty to other emerging Europe currencies.

Heavy selling across emerging market currencies began in January, catching many investors off guard. In late January, the Argentinean peso posted its largest one-day decline in more than a decade, while other emerging market currencies, including the Turkish lira, the South African rand and the Brazilian real, also took a battering.

(Read more: When will it be time to buy back into emerging markets?)

Many pointed to the reduction of the U.S. Federal Reserve's monthly stimulus program, which began in December and was reduced by another $10 billion in January, as the key reason for the sell off.

Nathan Blaney | Getty Images

HSBC agreed that the catalyst fora sell off in EM currencies could be traced to U.S. tapering, particularly for those countries with current account deficits: the Brazilian real, the Indian rupee, the Indonesian rupiah, the Turkish lira and the South African rand. Those five currencies have fallen between 10 and 20 percent since last May, when tapering fears first began to emerge.

However, HSBC emphasized that the Fed's balance sheet would continue to expand for most of 2014, just at a slower pace than before.

(Read more: Emerging market currency 'contagion' spreads)

"In addition," HSBC noted, "liquidity is a global phenomenon and the U.S. Fed has not been the only provider. The Bank of Japan's aggressive monetary expansion, involving liquidity injections of roughly $70 billion each month, is set to continue and will likely be expanded further later in 2014."

The bank also noted the European Central Bank was likely to introduce "some form of easing" in 2014, while the Bank of England's balance sheet is also likely to remain stable.

(Read more: Emerging market turbulence to be short-lived: DBS CEO)

However, Mike Crofton, president and CEO of the Philadelphia Trust Company, told CNBC that he was concerned about the emerging market picture, and that economic growth problems in China and Europe would have knock-on effects for the region.

"I think the emerging markets have some trouble, the momentum has turned against the emerging markets so that is one force that is going to be tough to reckon with," Crofton told CNBC.

"Also there certainly is a lot of uncertainty about the depth and the direction of the economic expansion. The emerging markets could have some difficulty; it's going to depend market to market, there are certainly some dead issues…and there are certainly a lot of currency issues there."

HSBC argued that capital inflows had indeed slowed into emerging markets but they had not gone into reverse. With the "fear factor" of tapering now passed, volatility would remain low and these countries would enjoy their share of the abundant global liquidity on offer.

"Emerging market economies likely face further adjustments ahead, but we believe the correction in many EM currencies is now largely complete," HSBC concluded.

Contact World Economy

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    To learn more about how we use your information,
    please read our Privacy Policy.
    › Learn More