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Captain Murphy’s Diary

Updated: May 19, 2022

Murphy’s Law says that what can go wrong, will go wrong. It is thought to be named after Captain Ed Murphy, an aircraft engineer who, frustrated with the work of an incompetent colleague, is alleged to have remarked, “If there is any way to do it wrong, he will.” This section is dedicated to combing the financial markets for risks that are lurking out there, preparing to pounce.

Emerging markets are proving yet again that they can be a horrible place to invest. Currencies across the emerging world have been falling of late and even the strongest emerging currency of them all, the Chinese yuan, has succumbed to weakness, albeit government-induced. Is it possible that another Asian financial crisis or Russian debt crisis is lurking in the wings?

"Even renowned publications like the FT get it wrong"

It is very hard to say where or when a similar crisis might start, but countries that have borrowed dollars and export oil must be hurting right now . One such country is Kazakhstan and as I write its currency has just plummeted 23% against the dollar , having previously been pegged to it. The likes of Russia, Nigeria and Venezuela must also be under severe pressure.

One issue that gets misunderstood is the difference between the nominal value of currencies and their real value which takes relative inflation rates into account. Even renowned publications like the FT get it wrong. A recent article in the paper was titled “Emerging currencies hit 15-year lows”. In it, the authors cite the JPMorgan Emerging Market Currency index as having fallen to its “lowest level since it was created in 1999”. Unfortunately the index in question consists of nominal exchange rates against the US dollar, not real ones. This means that it does not take account of the fact that consumer prices across the emerging world have risen much more than in the US, so emerging market currencies are not (yet) as competitive as the FT suggests.

Barclays Capital runs a series of real effective exchange rate (REER) indices. Their emerging markets REER index rose by 50% from lows in early 2004 to a recent high attained earlier this year. True, much of this was attributable to the strength of the Chinese yuan but this in itself is instructive: the yuan could have much further to fall.

Published in Investment Letter, September 2015

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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