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\n<\/div>\nThe year has been great so far for risk assets from stocks to credit, and emerging-market assets have joined in the party. Except, recently, for their currencies.<\/span><\/span><\/p>\n Among the observations in a widening debate on the missing gains: some fund managers highlight their greater sensitivity to the risks of a global slowdown. The fact that these exchange rates have largely gone sideways since the end of January suggests continuing worries even as global equities build on their first-quarter surge.<\/span><\/span><\/p>\n <\/p>\n Conversely, any pick-up in developing-nation exchange rates could be a good sign that the global appetite for risk is truly back in bullish mode.<\/span><\/span><\/p>\n \u201cI see two challenges for EM currencies,\u201d said Pierre-Yves Bareau, head of emerging-market debt at JPMorgan Asset Management in London. \u201cFirst, the U.S. dollar is still rather strong. Secondly, the market needs to see more growth bottoming out to buy the 2018 growth laggards — like emerging markets.\u201d<\/span><\/span><\/p>\n <\/p>\n Following are a variety of perspectives on the missing rally in developing-nation currencies:<\/span><\/span><\/p>\n Growth Problem<\/span><\/span><\/b><\/p>\n While bonds and stocks have been able to take heart from central banks\u2019 shift away from policy normalization, for the currency market, it\u2019s going to take actual evidence of an acceleration in growth before a reaction occurs. That\u2019s the thinking of Bryan Carter, head of emerging-market fixed income at BNP Paribas Asset Management in London.<\/span><\/span><\/p>\n The very reason for the Fed\u2019s about-face after all was the sluggish economic data and growing risk of a \u201cgrowth shock,\u201d Carter said. \u201cWe don\u2019t see FX outperforming until the data in Europe and emerging markets convincingly demonstrate an upturn, and investors reset their forward growth expectations higher.\u201d<\/span><\/span><\/p>\n <\/p>\n Dirk Willer, head of emerging-market fixed income strategy at Citigroup Global Markets in New York, puts particular blame on the euro region, saying that a weak euro has held back a rally in a number of other currencies against the dollar. That in turn has stemmed in part from the slowdown in China, on which the region has increasingly relied. With better China purchasing manager indexes, \u201cwe may be able to look forward to a turn in euro zone data as well. The pessimism surrounding the euro may start to fade, removing a headwind for EM FX,\u201d he said.<\/span><\/span><\/p>\n Enough Already<\/span><\/span><\/b><\/p>\n After a decade of easy money from the rich world\u2019s central banks, developed-nation\u00a0fund managers<\/span>\u00a0might have largely had their fill of emerging market currencies. It\u2019s a phenomenon that Institute of International Finance analysts including chief economist Robin Brooks call \u201cEM positioning overhang.\u201d That\u2019s why the Fed\u2019s dovish pivot this year — which has helped stoke the rally in everything from stocks to corporate bonds — isn\u2019t having such a big impact on some exchange rates, they argue.<\/span><\/span><\/p>\n <\/p>\n IIF international portfolio tracking data show \u201cthe volume of flows to have been on a steadily declining trend for many years, with each successive dovish shift from the Fed less potent than the one before,\u201d the group wrote last month.<\/span><\/span><\/p>\n Weak Inflows<\/span><\/span><\/b><\/p>\n Kiran Kowshik at UniCredit Bank AG said he and his colleagues \u201caren\u2019t really convinced\u201d by the \u201coverhang\u201d theory. Instead, he highlighted in an April 2 note that foreign-direct investment inflows \u201chave stagnated at weaker levels\u201d for emerging markets. FDI and current-account flows don\u2019t tend to shift quickly based on shifting central bank policies or global risk appetite, he noted.<\/span><\/span><\/p>\n <\/p>\n The bigger problem is that emerging-market growth has suffered a structural slowdown in recent years, offering little incentive for developed-nation investors to pour in. Another flow dynamic to note: the moves that some current-account deficit countries took to reduce their vulnerabilities since the 2013 taper tantrum are largely done, he argued.<\/span><\/span><\/p>\n \u2018Twice Shy\u2019<\/span><\/span><\/b><\/p>\n In something of a parallel hypothesis, Morgan Stanley currency strategists led by Hans Redeker in London detect a hesitation among investors who had anticipated a bigger dollar reaction out of the Fed\u2019s abandoning plans for further interest-rate hikes this year. For the record, this group anticipates that will change providing growth outside the U.S. — and particularly China — continues to improve.<\/span><\/span><\/p>\n \u201cDespite these growing signs that EM FX will gain and the dollar weaken, investors seem cautious with low conviction,\u201d Redeker and his colleagues wrote April 4. \u201c\u2018Once bitten, twice shy\u2019 seems to be the view. After all, false starts have happened before and the surprising stability in FX has left investors waiting for clearer signals.\u201d<\/span><\/span><\/p>\n No Outlier<\/span><\/span><\/b><\/p>\n Further on the Fed\u2019s tilt, a number of analysts highlight that the move hasn\u2019t had as much of an impact in the foreign-exchange market because other central banks have shifted too, including in emerging markets. India last week lowered its benchmark rate for the second time this year.<\/span><\/span><\/p>\n The Fed did a big pivot but everyone else became dovish very quickly after that, said Nick Eisinger, who co-manages Vanguard Asset Management\u2019s global EM active fixed-income funds totaling $10 billion in London. \u201cPotentially emerging-market currencies can be a more interesting trade going into the second quarter,\u201d he said, pointing like the Morgan Stanley team to better China data.<\/span><\/span><\/p>\n Political Volatility<\/span><\/span><\/b><\/p>\n \u201cUpside for EM currencies seems capped due to the volatility coming from places like Turkey,\u201d said Patricia Perez-Coutts, a money manager at Westwood Management Corp. in Toronto. Turkish President Recep Tayyip Erdogan \u201crecently came up with a policy of\u00a0squeezing funding\u00a0for those who want to hedge. This sent shock-waves across many EM markets, such as Brazil, whose currency came off sharply on the news.\u201d<\/span><\/span><\/p>\n Brazil itself \u201chas been wobbly of late. There are cracks on the path of acceptance of the new fiscal reform,\u201d she said.<\/span><\/span><\/p>\n One other potential contributor weighing on emerging-market currencies are the number of\u00a0elections\u00a0taking place this year, said Jameel Ahmad, Cyprus-based global head of currency strategy and market research at FXTM. Votes have taken place in Turkey,\u00a0Nigeria,\u00a0Thailand in recent weeks but the upcoming period will see the likes of the Philippines, Indonesia and South Africa all having their own elections, he said.<\/span><\/span><\/p>\n Differentiation Game<\/span><\/span><\/b><\/p>\n Many market participants say it\u2019s a mistake to regard the emerging currencies as a bloc. Bareau at JPMorgan Asset said that capital flows and balance of payments will differentiate the currency laggards from the leaders, and that Asian assets appear in a good position.<\/span><\/span><\/p>\n Similarly, Kowshik at UniCredit favors currencies of economies with strong combined current-account and FDI positions. Russia\u2019s ruble \u201cappears relatively resilient,\u201d he wrote.<\/span><\/span><\/p>\n<\/div>\n