Morgan Stanley Sees Cheap Emerging Market Hedges Amid Virus Risk
Morgan Stanley strategists suggest taking advantage of low volatility to hedge a portfolio of EM risk assets.
(Bloomberg) -- The deadly coronavirus is threatening the recent rally in emerging assets, but there’s cheap options to buy some protection, according to Morgan Stanley.
“We suggest taking advantage of low volatility to hedge a portfolio of EM risk assets,” Morgan Stanley strategists including London-based James Lord wrote in a note Monday. “With volatility at historical lows across many asset classes, a temporary pullback in EM currencies and high-yield credit is possible.”
The rapid spread of the novel coronavirus from China, which now has a death toll above 100, has gripped global markets in recent days as investors assess the ability of China and other countries to curb the disease. Developing-nation stocks and currencies have erased this year’s gains.
Recommendations from Morgan Stanley include:
- Long volatility and short-Korean won structures can hedge against a potential global growth slowdown amid expensive spot valuations
- Use long U.S. dollar/Mexican peso forward volatility as a hedge against U.S. election risk or an S&P 500 correction
- Go long volatility/short Colombian peso structures against a potential tightening in EM funding conditions
--With assistance from Christopher Anstey.
To contact the reporter on this story: Joanna Ossinger in Singapore at jossinger@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Karl Lester M. Yap
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