Korean won looks set to outperform

Asian central banks look set to let their currencies strengthen following China's June 19 announcement that it will depeg the renminbi from the US dollar. But that move is not the only reason why non-Chinese units are attractive, says Alexander Kozhemiakin, Boston-based director of emerging-market strategies at asset manager Standish.

Meanwhile, New York-based financial services group BNY Mellon -- of which Standish is a subsidiary firm -- expects to have hired its first Asia-based analyst dedicated to Standish by the end of the year. The focus of the Singapore-based role will be mainly on Asian fixed-income markets, and further hires are likely down the line.

Kozhemiakin, who manages $4 billion in emerging-market debt strategies, was speaking to AsianInvestor last week during a trip to Hong Kong.

"We find that an attractive -- albeit a relatively volatile -- way of taking advantage of the expected gradual appreciation of the yuan is through non-Chinese currencies," he says, "such as the Korean won, Malaysian ringgit, Indonesian rupiah and Indian rupee.

"Why? If you think the yuan is undervalued, it's logical to think the Korean won is a bit more undervalued," says Kozhemiakin. Despite some concern about the political risk from the Korean peninsula, Standish regards the won is one of the most undervalued Asian currencies by around 15-20% on a long-term basis.

The reason for this, he says, is that the Chinese have kept the currency stable, pegged to the dollar during the crisis, while a lot of currencies depreciated against the greenback -- the won in particular.

Since 2008, the situation in the Korean capital markets has improved quite considerably, he adds, and the spreads on South Korean dollar-denominated bonds are now trading at the levels seen prior to the Lehman Brothers collapse in September 2008. "The won hasn't caught up in that rally because the central bank is slowing the process of appreciation now that the capital flows have resumed." 

Others take a similarly positive view. "Look out for KRW outperformance," says RBS in a June 28 emerging-markets strategy alert. "In the FX space, the commencement of policy tightening as well as year-to-date laggard performance will provide the chance for KRW to regain its lead in the Asian FX bloc. We recommend going long KRW against short CNY as we expect only modest appreciation in the CNY within the next three months."

As for other Asian units, assuming the continuation of the moderate global economic recovery, Standish believes there is much more upside in non-Chinese currencies than in the renminbi. Indeed, says Kozhemiakin, "we would have expected them to continue appreciating even in the absence of more apparent flexibility in the Rmb regime, on the basis of the balance of payments".

"Central banks outside China are no longer saying they're going to prevent currencies from appreciating beyond a certain level," he adds. "They're just smoothing volatility, slowing the process of adjustment, leaning against the wind."

Kozhemiakin suggests that the continued rise in foreign-exchange reserves is clear evidence of central bank interventions. "The process is gradual, because central banks are on the other side of the trade," he says. "But that's fine -- it reduces the volatility and, again, they are not defining a certain limit or drawing a line in the sand."