Morgan Stanley keeps faith in some EM’s worst currency losers

South Africa’s rand, Turkey’s lira and Brazil’s real may be among the worst-performing emerging-market currencies in the past month, but Morgan Stanley isn’t giving up hope.

The lender’s VIRP model, which produces buy and sell signals based on volatility and idiosyncratic risk premia, remains long on those units, as well as Russia’s ruble, even as a rally in developing-nation assets loses steam amid rising geopolitical risks and lingering concerns over a US-China trade dispute.

“Despite the recent pause in the EM rally, the model continues to have a positive bias toward the asset class amid dovishness across major central banks and expectations of further progress in the trade dispute between China and the US,” Andres Jaime, a New York-based quantitative strategist at Morgan Stanley, wrote in a client note. “We do acknowledge that EM risk premia have been reduced and more reliance on a softer dollar is warranted in order to trigger a second rally leg in EM.”

The Morgan Stanley model is short Colombia’s peso, Malaysia’s ringgit, Indonesia’s rupiah and the Thai baht, while showing the Chinese renminbi close to triggering a sell signal, Jaime wrote. The signals should be used as inputs in investment decisions rather than rule-based trading strategies, he noted.