How We Think About Currency in Emerging Markets
- Shaw Wagener
- Portfolio Manager
- Based in:
- Los Angeles
- Investment experience:
SHAW WAGENER: One aspect in emerging markets that oftentimes people will ask about is currency. Interestingly, they tend to ask about it after the currencies have gone down. Most of the time, people don’t really pay attention to the currencies when they’re strong. They really want to know what is an approach to currencies when currencies are weak.
We’ve had many bouts of weak currencies in emerging markets, and we’ve had many bouts of strong currencies in emerging markets. There are a few things I would observe. First of all is, in general, currency is not a significant part of total return in the long run in emerging markets. Over time currencies tend to work themselves out. And while sometimes it can be positive, sometimes negative, over the very long run, emerging market currencies haven’t had that substantial of an impact to overall total return. That’s worth keeping in mind.
However, there are periods of time when currencies can be quite susceptible to going down. And in those periods of time in the past we work with our currency group — we have a macroeconomic currency group here at Capital, it’s part of our global approach to research — and try to understand those currencies that could be most vulnerable in the environment in which they’d be most vulnerable.
And we can approach it in a couple of ways. One is we can hedge currencies. And then, of course, the other way — which is very important — is to look at companies with the view that the currency in which they report their earnings and their financials may be going down, yet the business that they have and the product they sell is valued in another currency, like the dollar. And in those cases, oftentimes just investing [in] those companies in the context of a weaker currency ends up providing more total return in dollars, because they benefit by the weakness of their currency relative to the product sales price that they receive in revenues.