Currencies have had a central theme so far in 2014: buy the USD. While the upcoming end to QE in the US has not affected the price of treasuries as expected, currencies have reacted strongly. The dollar index is up almost 8% in the first three quarters of 2014 and at a four-year high. After years of depreciation, the USD is up against all sixteen major currencies this year:
How have frontier market currencies fared? Although frontier equity markets are known to be less correlated to their developed counterparts, currencies are different since they rely on global trade flows and are much more impacted by macro trends.
Here is how frontier markets in equities and currencies have fared through three quarters in 2014:
- The USD has been dominant against frontier markets across the globe with the exception of Asia.
- We touched on how well Asia has done this year in a previous post, but the performance of South Asia is truly incredible this year.
- Europe is unsurprisingly the worst currency performer this year due to the number of frontier countries in that region impacted by the Euro.
- Central Asia has also been negatively impacted by an over-reliance on commodities and its closeness to Russia (the ruble is down 17.7% this year).
- Africa and the Americas are around average, while the Middle East has fared slightly better due to the prevalence of pegged/highly managed currencies.
Here are the five best and five worst performing frontier market currencies so far in 2014 (excluding returns on interest):
Best Performing Frontier Market Currencies, Q1-Q3 2014:
Malawi’s Kwacha is the surprise currency leader this year, and its stock market has also performed well with a gain of almost 16% in USD terms this year. The Kwacha has outperformed due in part to tobacco sales and also because it had performed so badly in 2013, losing almost 30%. While it has stabilized so far in 2014, it has yet to recover from the massive devaluations seen in 2012.
We’ve mentioned Pakistan before, and South Asia as a region has performed very well, with India also among one of the best performing markets in the world this year.
Worst Performing Frontier Market Currencies, Q1-Q3 2014:
Ukraine’s Hryvnia is the biggest loser this year due to ongoing geo-political strife. We’ve touched on the Ghana Cedi’s problems in a previous post.
Argentina is a special case, and the almost 30% depreciation is only against the official rate. Black market rates have the USD/ARS rate at over 14, which would easily put Argentina at number one on this list. However, since it is hard to find up to date data on the black market rate, we continue to use the official rate for now.
Select frontier market currencies have been among the best performing in the world this year, but as a group they were much more correlated with the rest of the world than equities. This was as expected given how tied a currency is to a country’s economic performance. However, equity volatility and returns are still much larger than currency moves as a whole, so the overall return of a country’s stock market in USD terms will continue to show less correlation to developed markets.