If you held unhedged Thai assets in 2019, you got an 8.6% bonus payment on your holdings for doing nothing. The Thai baht rose by that amount, the largest move among major currencies globally last year.
It's something of a surprise because emerging-market currencies generally lose ground during periods of geopolitical turmoil. They have sold off the last few days, for instance, after President Donald Trump ordered the drone strike that killed Iranian special forces chief Qasem Soleimani.
Why was the baht a buy? Thailand, for once, was a picture of political stability last year.
After elections last spring went off without a hitch and more or less democratically, the military junta stepped down, even if the former commander-in-chief of the army remained as prime minister. Now there's a balance in parliament between left-wing, largely rural "red shirts" and right-wing, urban "yellow shirts."
The baht outstripped other Asian emerging currencies by a wide margin. The next-best performance came from the Philippines peso and the Indonesian rupiah, which both rose 3.8% for the year.
The baht rose sharply heading into the elections and again as the results were confirmed and a coalition formed the current administration. But the currency was on a steady strengthening trend the whole year and has yet to buck that trend.
Its rise poses a problem for the government because it makes Thai exports less competitive. The Thai economy is growing steadily, forecast by Oxford Economics at around 3% each of the next three years. A decent current account surplus has also backed the baht.
To avoid complications to that economic growth due to currency gains, the Bank of Thailand has cut rates twice and looks set to do so again in the first quarter. It also eased regulations on capital outflows in November and last July implemented several measures to prevent further baht escalation, such as tapering its supply of bonds to prevent hot-money inflows.
So holders of baht-based assets should wait for now, with gains continuing, but watch for the currency turning south. It has gone from around 33 THB to the U.S. dollar to 30.
Investors may be better off looking to last year's currency underperformers for gains.
The Korean won was the worst performer in Asia in 2019. It lost 3.5%, punished by concerns over the export-driven economy's reliance on semiconductors, an industry that faces a glut of supply. The Indian rupee dropped 2.3% and the Chinese yuan fell 1.2%.
But the won has gone from ugly duckling to swan. It was the top-performing Asian currency in December, up 1.7%, with signs of economic recovery and interest rate cuts apparently complete. The rupee also looks likely to gain, and the yuan will feel a definite boost if and when any U.S. trade deal comes together.
Korean stocks also went on a run in December, so you got a double boost for holding unhedged Korean stocks. The benchmark Kospi is up 4.2% since Dec. 4. Investors are reacting to data showing that the pace of the export decline is slowing while chip prices are rising earlier than expected. Chip exports should turn positive in the first quarter.
The Indian rupee may also recover in 2020. Société Générale sees it as the top play in Asia this year. In case global growth disappoints, the Indian economy is domestic, and therefore has limited external vulnerabilities. SocGen would go long the rupee and short the rupiah, since that exchange rate is near a five-year low.
SocGen would also prefer to go long the Japanese yen and sell the Korean won. If the U.S. economy shows weakness and risk assets come under pressure, the Japanese currency should hold its value. Two interest rate cuts in Korea mean it's a low-yielding currency, although the recent won gains came after SocGen made that call.
The U.S. dollar and the Japanese yen, perennial safe havens, have benefitted as U.S.-Iran relations get increasingly tense. There's no good explanation other than investors feeling concerned. And it's probably a short-term effect.
"There is no need to look for fundamental reasons," Ulrich Leuchtmann, Commerzbank's head of foreign exchange research, says in a briefing. "The reflex of the currency market is to do what has worked in similar situations in the past."
The logic behind this retreat to the greenback leaves something to be desired. But that doesn't matter when the herd starts to move. The U.S. dollar is a safe haven not because it has intrinsic qualities that make it a safe haven. It is a safe haven now because it has been a safe haven in the past.
"When the bombs fall, investors push into the dollar," Leuchtmann notes. The yen experiences the same trends, even appreciating against the U.S. dollar occasionally.
Emerging-market currencies suffer, with the South African rand currently feeling the most pain. In the Asia Pacific region, the Aussie dollar (not an emerging currency, obviously, even if locals jokingly call it the "Pacific peso") tends to get hit at times of global tensions because Australia's economy is export-linked and sensitive to economic cycles.
The current flight to quality will likely continue as long as the U.S.-Iran posturing continues to escalate. But generally, these currency trends don't last long and reverse suddenly.
"As soon as an end to the conflict is in sight, market participants typically push back very quickly into positions that they had to give up due to the crisis," Leuchtmann says.
It does not have to be an end to hostilities that reverses the trend. Investors simply want a clearer picture of where things are headed.
It can even be the start of conflict that settles investor minds because they at least know what's happening. In the first Gulf War, for instance, the safe-haven flight stopped abruptly as the very first U.S. air operations began in January 1991. The war was a firm outcome. And we knew who was going to win that particular skirmish.
The air strikes have started the uncertainty this time rather than resolved it. "But the lesson of that time is that as fast as investors push into 'safe havens' now, they are willing to leave them," Leuchtmann notes out. "And typically they don't wait until peace arrives."