Despite concerns about an eventual Federal Reserve interest rate hike, currency traders may want to take a look at emerging market currencies, along with related exchange traded fund, for cheaper value plays.
For instance, currency traders can track the broad group of emerging market currencies through the WisdomTree Emerging Currency Strategy Fund (NYSEArca: CEW), which tracks the U.S. dollar against the Mexican Peso, Brazilian Real, Chilean Peso, Colombian Peso, South African Rand, Polish Zloty, Russian Ruble, Turkish New Lira, Chinese Yuan, South Korean Won, Indonesian Rupiah, Indian Rupee, Malaysian Ringgit, Philippine Peso and Thai Baht. CEW has dipped 1.7% year-to-date and declined 10.3% over the past year.
“There’s a valuation signal there that’s quite strong,” Julien Seetharamdoo, chief investment strategist at HSBC Global Asset Management, told CNBC. “Some of those currencies should strengthen in the medium to long term.”
Specifically, Seetharamdoo pointed to the South Korean won, Indian rupee and Malaysian ringgit.
CEW includes a 6.7% tilt toward the won, 6.9% to the rupee and 6.6 to the ringgit.
Nevertheless, currency observers warn that a higher interest in the U.S. could spur outflows from the emerging market assets as higher yields in the U.S. Treasuries, which are considered a safe-haven, make riskier assets less appealing.
“It’s difficult to time these markets perfectly,” Seetharamdoo warned. “There’s definite risk of more volatility and more weakness in the short term,” especially as the Fed raises interest rates.
The Fed has left its benchmark rates unchanged Wednesday but suggested rates could rise later this year.
A mass exodus from the emerging markets occurred on a similar premise during the so-called taper tantrum in mid-2013 after the Fed hinted at tapering the bond purchasing program.
Seetharamdoo, though, pointed out that while other assets, like bonds have stabilized after the taper tantrum, emerging market currencies have continued to sell off for over two years.
“Most EM currencies now appear undervalued against the dollar, which is quite different to the situation that prevailed two years ago,” David Rees, senior markets economist at Capital Economics, said in a note. “While we think that Fed lift-off will probably lead to some further dollar strength in the months ahead, on the whole we expect additional depreciation of EM currencies to be limited.”
WisdomTree Emerging Currency Strategy Fund
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Max Chen contributed to this article.