Hirst: Look for Opportunities in EMFX

Your Real Vision Daily Briefing for April 23, 2020

Ed Harrison hosts Roger Hirst for a discussion about emerging market credit risk, helicopter money, and the unwinding of the commodity daisy chain.

  • US markets are being distorted by central bank activity, but going outside US assets may be a smart way to play the disconnect between the financial and real economy.
  • Investors can find opportunities in foreign currencies and emerging markets. In the US, they may want to consider distressed assets like CLOs.
  • The framework of how business is done and how we invest money has fundamentally changed, so markets remain vulnerable outside of central banks pumping the market.

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The liquidity the Fed has pumped into US markets has distorted the landscape and as a result, free-floating markets like the Foreign Exchange Market and certain emerging markets (particularly EM bonds) present simpler opportunities for investors, Roger Hirst said during today’s Real Vision Daily Briefing.

As US equities climb toward the 62% retracement mark, Hirst said we are carving out a rebound, but we could overshoot, so taking a short position presents a lot of risk and is a hard trade to hold.

“My preference overall is to go to other countries where there are simpler opportunities and you’re not fighting against what is a tsunami of liquidity,” he said.

Hirst is looking at the JPMorgan EMFX index, which has been grinding around all-time lows over the past few weeks, and said that investors may want to play the currencies that have already broken down, where dollar strength is on your side, like the currencies of Mexico, South Africa, and Brazil.

“If you pick out one or two of the commodity-reliant currencies, that’s a much safer way of playing the macro than being short the S&P where you’re battling against the Fed as well,” he said.

Hirst also discussed CLOs and said there could be opportunity for a savvy investor to come in and pick up some things that look good after the downgrades come through. Often the best way to play is to pick up the distressed assets rather than chase the distressed assets down, he said.

Overall, pressures are building up underneath the liquidity provided by the Fed and while everyone is hoping for a quick recovery, Hirst said that the framework of how business is done and how we invest money has fundamentally changed, so markets remain vulnerable outside of central banks pumping the market.

We don’t have a lot of visibility going forward, there’s a lot of potential negativity to come that is not priced in, and a rebalancing may be in order, he said.

“The real world beyond the US equity market is showing us that there is a lot of pain.”