The asset management team at HSBC sees ample opportunities in emerging market currencies, as many of them look cheap compared to purchasing power parity estimates.

Investors should target currencies that are undervalued and where central banks have sound inflation fighting credentials, the UK asset manager argues. HSBC gives examples such as the Chinese yuan, the Indonesian rupiah, the South Korean won, the Malaysian ringgit, the Singapore dollar and the Chilean peso.  

Emerging market currency appreciations should be a cornerstone of long-term returns for equity and local currency bonds in emerging markets, HSBC writes in an investment note entitled Hangover (the True Story).

The report also points out that developed market currencies such as Swiss franc and Japanese yen now look expensive. In both cases, the central banks have intervened to try to curb appreciation. Investors should also stay clear of the euro, which also looks expensive given the eurozone risks.

The Hangover in real life

Besides currencies, the UK bank argues that the summer sell-off has created medium-term value in both hard and soft commodities. “Russia (energy and hard commodities) and Latin America (soft and hard commodities) equities and currencies are ways to play this theme,” says the report, which is written by Philip Poole, global head of macro and investment strategy.

The title of the report, Hangover (the True Story), is a reference to the Hollywood blockbuster, which is compared to the debt crisis resulting from a “binge party” of fiscal profligacy most developed economies took part in before the crash in 2008. HSBC believes that this burden will continue to act as a brake on the global economy and financial market performance for years to come.