By Lilian Karunungan and Kim Kyoungwha
Nov. 3 (Bloomberg) -- The biggest rout in Asian currencies since the crisis in 1997 is tempting investors to buy in the region that still enjoys the world's fastest economic growth and $4 trillion of reserves.
Franklin Templeton Investments, which manages about $500 billion, favors the Malaysian ringgit and China's yuan. Sydbank A/S, Denmark's third-largest bank, is buying South Korean won, Indonesian rupiah and Indian rupee. Goldman Sachs Group Inc. said last week that the won, Asia's worst-performer this year after falling 26 percent against the dollar, may gain 10 percent the next six months.
``We have taken advantage of the recent broad-based weakness to increase our exposure to some Asian currencies,'' said Michael Hasenstab, manager of the $9.6 billion Templeton Global Bond Fund in San Mateo, California. ``The differential in growth between Asia and other regions should continue to attract capital, and growth may further benefit from initiatives of local governments that have significant resources to bolster domestic demand.''
While stocks and foreign exchange rates in emerging markets tumbled since the collapse of Lehman Brothers Holdings Inc. in September, Templeton, Sydbank and Mirae Asset Global Investments Ltd., which oversee a combined $563 billion, say Asian economies are safer because banks and governments spent a decade amassing reserves, laying the foundation for sustained growth.
Reserve Pools
China, India and Southeast Asia's five other largest economies will grow 8.4 percent this year and 7.7 percent in 2009, according to the International Monetary Fund in Washington. In the U.S., where financial companies have been battered by about $430 billion of subprime-related losses, gross domestic product will expand 0.1 percent next year. The forecast for the 15 European nations sharing the euro is 0.2 percent.
Asian nations have seven of the 10 biggest pools of foreign-exchange reserves, according to data compiled by Bloomberg. China's $1.9 trillion holdings account for 28 percent of the worldwide total. Japan has the second-highest tally at $969 billion. India, Taiwan, South Korea, Singapore, Hong Kong and Malaysia each have more than $100 billion, the data show.
``For a longer-term picture, Asian currencies should perform better,'' said Wilfred Sit, who helps oversee $10 billion as chief investment officer in Hong Kong for Mirae, South Korea's biggest asset manager. ``We are not the center of this turmoil and, in general, governments and people have their savings.''
Currency Rebound
The won and the rupee strengthened last week after central banks in the U.S., China, South Korea, Japan and Taiwan cut interest rates. India unexpectedly lowered its benchmark rate to 7.5 percent from 8 percent on Nov. 1 to boost growth.
Korea's won climbed 10 percent in the week, rebounding from a decade-low 1,495 per dollar on Oct. 28, while the rupee gained 1 percent to 49.4575 to the dollar. The rupiah closed at 10,975 per dollar, after touching a seven-year low of 11,900. The median estimates of analysts surveyed by Bloomberg show the won may rise to 1,250 by the end of March and the rupiah to 9,700.
The won rose 2.3 percent to 1,262 as of the 3 p.m. close in Seoul, while the rupee advanced 1.5 percent to 48.75.
``The currencies have cheapened massively,'' said Holger Friedrich, a portfolio manager in Aabenraa at Sydbank, with $3.7 billion in emerging-market debt. ``Weaker currencies should help accelerate growth, by making exports more competitive.''
The past three months have been some of the tumultuous ever as a seizure in credit markets and the bankruptcy of New York- based Lehman prompted investors to dump emerging-market assets.
Rising Volatility
The Bloomberg-JPMorgan Asia Dollar Index, which tracks the region's 10 most-active currencies excluding the yen, fell 7.4 percent in August, September and October, its worst stretch since plunging 16 percent in the period ended Jan. 30, 1998. Last month alone Indonesia's rupiah dropped 13 percent, the won tumbled 8 percent and the Indian rupee declined 5 percent. The MSCI Emerging Markets Index of stocks lost 28 percent.
JPMorgan's Emerging Market Volatility Index soared to a record 32.96 on Oct. 23 before falling to 25.42 today. The index never exceeded 15.66 until Lehman's bankruptcy, according to data compiled by Bloomberg.
The slide in Asian currencies led companies including Citic Pacific Ltd., the Hong Kong arm of China's biggest state-owned investment company, to lose money on currency hedges. Taesan LCD Co., a South Korean supplier of back-light units for computer screens, failed under the weight of such losses. ICICI Bank Ltd., India's second-biggest lender, suffered a run on deposits after disclosing losses on investments in Lehman.
`Wait to See'
There may be worse to come, as more than a dozen developing nations will likely turn to the IMF for emergency funding, said Stephen Jen, the global head of currency research at Morgan Stanley in London. Ukraine, Hungary and Iceland have already received IMF assistance.
Japan's yen and the U.S. dollar have been the biggest beneficiaries of the disruption in emerging market currencies. The yen gained 14 percent versus the won last month, 19 percent against the rupiah and 12 percent versus the rupee.
``I'm quite positive, but I still think we should wait to see some more signs of recovery,'' said Rajeev De Mello, head of Asian bonds in Singapore for Western Asset Management Co., which manages about $600 billion. ``If we do see more signs of stabilization, we could have some pretty good opportunities.''
De Mello is avoiding Asian currencies except for the Chinese yuan until credit markets ``normalize,'' a process he said is beginning. Western, which manages $600 billion, is part of Baltimore-based Legg Mason Inc. The yuan gained just 0.2 percent since the end of June, after strengthening 6.6 percent in the first half.
`Stronger Footing'
While funds are returning to Asian markets, the pace is slower than last year. Bank of New York Mellon, a custodian for more than $23 trillion in assets, is starting to see ``modest inflows'' into the Indian rupee and Singapore dollar. Cash moving into the rupee is 50 to 75 percent of the average last year, said Samarjit Shankar, director of global strategy for the bank's Global Markets Group in Boston.
Templeton is betting Asian governments will use money they didn't have to spend bailing out banks to spur domestic demand, according to Hasenstab. While financial institutions worldwide have reported credit losses and writedowns of $685 billion since the start of 2007, banks in Asia have only taken $27 billion, according to data compiled by Bloomberg.
``The Asian financial system is on a stronger footing,'' said Hiroshi Morikawa, senior strategist in Tokyo at MU Investments Co., part of Mitsubishi UFJ Financial Group, Japan's biggest listed bank, which manages about $14 billion. ``That's why Asia's currencies have the potential to outperform.''
Pool Reserves
Thailand will propose Asian countries pool $350 billion of their reserves, Olarn Chaipravat, Thailand's deputy prime minister, said in an interview in Bangkok on Oct. 22. Some $200 billion would be set aside to buy equities, bonds and fund public projects. The rest would be used to protect currencies.
South Korea today announced a 14 trillion won ($10.8 billion) fiscal stimulus plan. China's State Council cut taxes for exporters and approved construction programs including expressways and power stations on Oct. 21. Japan announced on Oct. 30 plans to pump $51 billion into the economy. Indian Prime Minister Manmohan Singh, who faces national elections in May, has increased government salaries and announced farm loan waivers to support the economy.
``China's foreign-exchange reserves stand like mountains in contrast to the capital-hungry conditions in much of the rest of the world,'' said Jeffrey Knight, the chief investment officer at Boston-based Putnam Investments, which manages $137 billion. ``These reserves lend resilience to China's economy, and, in turn, help to buffer Asian economies.''
To contact the reporter on this story: Lilian Karunungan in Singapore at lkarunungan@bloomberg.net; Kim Kyoungwha in Beijing at kkim19@bloomberg.net.
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