The Swiss bank argues that a portfolio of emerging market bonds and currencies is likely to be less correlated to global equity markets than an emerging market equity portfolio; Credit Suisse sees greatest potential in lower yields in Latin America and Eastern Europe.

A new white paper, entitled The Way Forward: Measuring the Impact of Short-Term Structural Growth Drivers on Emerging Market Investing, points out that emerging markets equities, rocked by the sovereign debt crisis in Europe, the political deadlock in the US and an increasingly harsh economic climate overall, declined about 20 per cent between May and August.

“Unlike what we have experienced in the past few months, the full-scale risk aversion that swept global markets in 1998 and, most recently, 2007-2008, triggered a huge risk-off trade, resulting in a significant increase in emerging market bond yields,” the report said. “The positive performance in emerging market external bonds this time around reflects, in our view, the trust of investors in the better fundamentals of emerging markets and, of course, the substantial rally in US Treasuries.”

More currency appreciation to come

“Additionally, we believe that this re-orientation will result in a major change in foreign exchange policy in the emerging markets,” Bunt Ghosh, head of emerging market strategy and risk, said in a video presentation of the white paper. “We believe that most emerging markets will be more prepared to allow their currencies appreciate against developed countries.”

Ghosh went on to say that the need for emerging economies to satisfy the growth in domestic consumption and control inflation in an environment of weak export markets is likely to lead to more currency appreciation. The potential for nominal currency appreciation, in the bank’s view, is largest in non-Japan Asia and smallest in Eastern Europe.

SEB, Sweden’s biggest bank, said in a recent report on Eastern Europe that local currencies are set to decline somewhat in the coming months before stabilising and gradually appreciating, but that total depreciation will not be as marked as in 2008.