Many emerging market currencies fell in value in August and September as various global worries took centre stage.
Investors were concerned that China would suffer a hard landing as the economy slowed significantly after years of boom.
In the world's largest economy, the United States Federal Reserve back then offered a relatively downbeat assessment of the global economy. There were also concerns that when the Fed finally raises interest rates - an event that could well come this week - capital would leave emerging markets.
Dr Michael Hasenstab says, however, he saw at that time - and still sees - value in Malaysian and Indonesian government bonds.
Conditions in Malaysia were nowhere near as bad as they were in the Asian financial crisis, yet the ringgit was trading at levels not seen since that currency meltdown in 1997-98. In his assessment, the currency is "easily more than 20 per cent undervalued".
Malaysia's current account remains in surplus despite a slowing China and falling commodity prices, partly because electronics exports have been rising. Its central bank reserves also more than cover all their short-term external debt obligations, he noted.
In the case of Indonesia, interest rates and the value of the rupiah are attractive, added Dr Hasenstab, who is a portfolio manager for a number of funds, including the Templeton Global Bond Fund. Low government debt, reasonably strong domestic consumption and the elimination of fuel subsidies would likely benefit the country.
Q What was your reaction to the market volatility in the third quarter?
A Our view was that the global economy is not as bad as people think.
It has decelerated but it will still have reasonably positive growth next year.
The depreciation of the currency in China and the sell-off in the equity market were not indicative of a hard landing. The old capital-intensive, heavy-industry low-end manufacturing is decelerating and needs further restructuring.
But there is a new economy that is emerging to offset that - backed by the service sector, higher-quality growth, moving up the value-added chain and innovation.
Without a hard landing in China, a lot of emerging markets are far better positioned to deal with the Fed rate hike than they had been in previous periods.
We maintained our exposures in South Korea and Malaysia and added places like Indonesia and Mexico.
Q What are your top picks for these markets as of now?
A For Malaysia, we are now looking at local, shorter-maturity, local-currency government bonds, so we are getting exposure to the currency and local interest rates.
By our estimates, the Malaysian ringgit is easily more than 20 per cent undervalued.
The yields are fairly low - they are around 2 to 3 per cent - hence for Malaysia, it is mostly for the currency, not about the yield that you can earn. We are looking at shorter tenors because we do not want to take interest rate risk. Interest rates are very low, and over time, those will need to normalise higher.
Q Why are you optimistic on Malaysia in spite of China's slowdown and falling commodity prices?
A It is true that Malaysia is going to be exporting less of the traditional exports to China, because of China's industrial slowdown.
However, Malaysia's trade balance and current account remain in surplus despite the slowdown in China and falling commodity prices because electronics exports have been rising.
Exports are almost equally balanced between electronics and commodities and Malaysia is a fairly competitive exporter of electronics. These are more consumer-related, and of which China is going to be consuming more. It can also export electronics to the world, so it's not just China.
Q What are other reasons for optimism on Malaysia?
A The ringgit dropped to levels below those during the global financial crisis (RM3.60 per US$1) and the Asian financial crisis (it was RM4.20 per US$1 in 1998).
However, the Malaysian economy is far stronger today than it was during either the Asian or global financial crisis. Then, the country was running a current account deficit of 10 per cent of gross domestic product (GDP), with foreign reserves representing only three months of imports.
Yes, growth is slower than it was five years ago. The current account surplus has come down to about 2.5 per cent in the third quarter, but that did not justify such a decline.
The Malaysian central bank also did a very good job of managing this crisis. Instead of trying to intervene in the market and wasting reserves, it allowed the currency to adjust and kept its reserves. The reserves more than cover all its short-term external debt obligations, so it still has that insurance buffer.
The ringgit has also been penalised by negative political headlines about some high-profile corruption scandals. Certainly those are bad to see, but they are not systemic to the entire country.
The weakness in exchange will feed through into a growth in exports, so it will actually improve its current account.
Q What about Indonesia?
A We are looking at a mix of shorter and longer government bonds.
We think interest rates there are already fairly elevated. Yields are around 8 to 8.5 per cent - that's a lot more attractive. The currency also looks attractive.
Indonesia is also primarily driven by domestic consumption, and that is still reasonably strong. Its big weakness has always been high oil prices. Oil prices are obviously not high now, so that is a benefit.
It has also, during this fall in energy prices, eliminated subsidies on fuel, and this gives a great future relief to the Budget because if energy prices do rise, the government is not going to be on the hook to subsidise those costs.
We also are quite encouraged by the new government in Indonesia. It is focused on infrastructure investment, which is really important for the country. Ports, roads, power - it is making some progress there. Indonesia also has very little government debt.
Q How would a Fed rate hike impact emerging markets?
A We do expect the Fed to hike rates this month and then continue to hike rates next year in a gradual path.
Ironically, this is the best thing for emerging markets because it would do two things. It would signal to the market that the global economy is not as bad as the Fed alluded to in September in its statement. It would also give the market a chance to observe that a Fed rate hike is really not that bad for these countries.
I think a couple of months after, when people observe that a Fed rate hike did not cause a recession in Mexico, for example, you would get a re-acceleration of emerging markets.