By Bilal Hafeez 15-07-2020
In: deep-dives | Emerging Markets FX

The Diversification Benefits Of Asia FX Futures

(4 min read)
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• ‘Emerging’ Asia economies are now as large as advanced economies, yet investors continue to show bias towards trading developed markets.
• At the same time, the performance of systematic trading strategies that solely focus on G10 have underperformed in recent years.
• We find that Asian FX provide important diversification benefits that G10 currencies cannot capture. This could provide an avenue to improve returns by expanding the universe of currencies traded.
For decades, investors have preferred trading developed markets over so-called emerging markets. This has especially been so for systematic traders and mode funds that use futures. Part of the reason is the size of developed economies and markets, part is that the investment returns possibilities were ample, and finally part is habit. However, all these factors are changing or should change.
Many emerging markets have now emerged – they now have larger economies and financial markets than many developed countries. Advanced economies made up 63% of the world economy in 1990, while emerging Asia made up 12%. Today, advanced economies make up 39% and emerging Asia a comparable 36% (Chart 1). Admittedly, the rest of emerging markets has not quite made the same strides as Asia – both emerging Europe and Latin America made up 14% of the world economy in 1990 and still make up 14% in 2020. So, the real story is the dramatic growth in Asian economies.
As for the returns possibilities, popular trading strategies such as FX momentum have struggled to deliver returns in G10 FX. Low interest rates and crises have likely reduced the differences across G10 markets, which could be impacting returns. Therefore, a crucial next step for investors is to broaden their universe of currencies, with Asian FX futures being the obvious candidate given the size of the Asian markets.


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