Can Rate Hikes Save These Emerging Market ETFs? [Ishares Msci Turkey Inv Market Index Fd, iShares MSCI South Africa Index (ETF)]

percent rateThe going was extremely tough for emerging market currencies in 2013 with the WisdomTree Emerging Currency Fund (CEW) shedding about 6% of its value. Steeper decline had been noticed in some currencies like Indian rupee (down 12.6%), Turkish lira (down 18.6%) and South African rand (down 20.4%). The firmness in dollar following the onset of QE taper talk in 2013 and a general risk off trade created this malaise.

On top of it, all these currencies were down in low-single digit in the last 15 days of January thanks to the Fed’s long-apprehended (by investors) decision to scale back QE program from January.  With a bit of risk off trade, Emerging markets seem to have lost their appeal, especially as U.S. treasury yields continue to rise. With a possibility of a faster QE trimming in the course of 2014 and flight of foreign investments from these developing nations, currencies are likely to weaken further in the coming days.

Rate Hike a Common Resort

Amid such a backdrop, central banks in Turkey and South Africa stunned investors by raising key rates, to prop up their struggling currencies on January 28 and 29 respectively. India also joined the bandwagon around the same time, but the step was taken to contain its stubbornly high inflation. Whatever be the prime cause, Indian rate hike should support its ailing currency.
Let’s see in details how proactive the individual central bank was in shoring up their stressed currencies (read: 3 Currency ETFs Crushed in Emerging Market Rout):


Turkey raised its overnight lending rate sharply on January 28 from 7.75% to 12%, one week repo-rate from 4.5% to 10% and overnight borrowing rate from 3.5% to 8%. Soon after the announcement, Turkish currency lira went to rallying and gained as much as 3%,  though it lost some of those gains later.
Higher rates will attract foreign investors to lira-denominated investments which will in turn boost the value of the currency.

South Africa

The scenario was little convincing for South Africa which went for just 50 bps rate hike to 5.5% on January 29 long after 2008. Notably, the South African rand has depreciated to a five-year low against the dollar in recent days losing about 25%in the last eight months. As per analysts, countries like South Africa need to protect its currency desperately as 40% of its total outstanding stock of debt is held by non-residentsWithout such measure, it will be hard to keep up the inflow of foreign capital over the long term. 


On January 28, the Reserve Bank of India (RBI) unexpectedly hiked its repo rate by 25 bps to 8% in a bid to contain inflation. With the latest hike, India has raised its repo rate by the same quantum thrice in the five trailing months (read: A Weaker Rupee–Boon or Bane for India ETFs?).

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