Fund manager warns against overestimation of China's markets


FrankfurtAbbas Ameli-Renani of the investment company Amundi does not keep his concerns behind the mountain. “I see many risks for emerging markets,” he says. His business is the investment in exactly these countries. Other experts are “cautiously optimistic,” such as the analysts of asset manager Barings. But tends to increase according to the judgment of most professionals, the risks rather.

Ameli-Renani is the Portfolio Manager responsible for Emerging Market Emerging Markets Emerging Markets Emerging Markets bonds. After all, he currently classifies a risk as low: “The Fed is currently worried us the least.” Like so many experts, he expects no rate hike by the Fed more this year.

Should it happen against all odds, then only in the case of an unexpected global upswing that would benefit the emerging economies. Ameli-Renani is currently overweighting the dollar, but expects the US currency to weaken towards the end of the year as the Fed has more leeway than the other central banks in developed markets.

The dollar's development and interest rates in the US play a key role for most emerging markets. If US investors see good return opportunities at home, they withdraw their money from emerging markets. The same thing happens when investors become risk averse. It is also important to note that in many emerging markets, governments or companies have borrowed in dollars. Too strong a dollar would cause them problems.

The Amundi man is especially worried about China. On Wednesday, the country announced surprisingly weak data on retail sales and industrial production. The trade conflict with the US is putting a strain on the country in the Far East. Above all, Ameli-Renani believes: “Markets are too positive for China's outlook.” In his view, they are over-reliant on the government to push the economy with generous spending.

Ameli-Renani warns: “The stimulus this time is only a third of what it was in 2015. In addition, it boosts domestic demand and therefore does not affect other countries so much.” The fund manager therefore sees growth for the current year in China ahead of less than 6.5 percent. He underweighted all currencies in the Far East.

China as big challenges

China is not just an issue for emerging markets. The question of how the economy develops there has effects worldwide – not least in Germany. At the same time, the country poses great challenges for analysts and investors.

The reliability of the statistics has been questioned again and again. The shadow banking sector, ie financing outside the official financial sector, is difficult to see through. The ability of the communist leadership, at least on paper, to control the world's second-largest economy is, in principle, acknowledged even by hard-hitting capitalists.

It is difficult to judge from the outside how dramatic the debt in the country is. The government and central bank in Beijing have repeatedly fluctuated in recent years between curbing credit growth and the shadow banking sector, as well as fueling growth – both of which are difficult at the same time.

What follows for bond investors? In essence, they can invest in emerging market debt in three ways: by buying paper in major currencies, such as the dollar; by buying papers in local currency; and by buying paper in local currency, but hedging the exchange rate through the derivatives market. This makes it possible, at least for professional investors, to assess the opportunities and risks of the bonds of a country and the respective currency separately.

In spite of its general reluctance, the Amundi expert, as a plus for the emerging markets, finds that, with the exception of Turkey and Argentina, inflation is almost everywhere under control. On average, it is just under three percent. He sees a favorable valuation for long-term government bonds in Brazil and South Africa, at least in the range from five to ten years. He also relies on the local currency in Brazil, but secures in South Africa.

Skepticism about Mexico

Ameli-Renani gives an example: very long maturities of up to 30 years bring in South Africa currently 9.5 percent return, the hedge against the dollar costs around five percent, remaining after all still 4.5 percent. In Brazil, he believes, markets are too pessimistic about financial reform.

Dekabank analysts fear that new president Jair Bolsonaro is already losing support for his economic plans; Politically controversial is his right-wing populist course anyway.

The election in South Africa is rated positively by Ameli-Renani. The ruling party had worse than last time, but better than expected cut off. Conversely, he is skeptical of the new Mexican President López Obrador. He trusts him a loose fiscal policy, which will ultimately lead to a weakening of bonds.

Anyone who wants to make a risky political bet, in the opinion of Ameli-Renani, despite the turmoil in Argentina. From the markets' point of view, the likelihood of Cristina Kirchner returning to presidential elections in October is over 50 percent. He himself rates this risk as significantly lower.

Kirchner had been on a confrontation course with investors in her previous term; her election could lead to sovereign default. If today's President Mauricio Macri or another moderate politician makes the race, the bankruptcy of his conviction, however, should be avoided.

Bright spot Turkey

In his view, the only bright spot for Turkey is that the weak currency has led to a reduction in the high deficit in the balance of payments. As a negative he sees that the government has spent more money on pump before the election again.

“With monetary policy, fiscal policy has lost its credibility,” said Ameli-Renani. Many experts, such as the Dekabank, also highlight the political loss of confidence that resulted from the cancellation of the election in Istanbul after a government candidate has won.

The Dekabank also sees increased risks in emerging markets. It also states that the economic momentum of these regions remains “generally rather weak”. As a positive for the region, their experts highlight low interest rates worldwide. Lazard Asset Management believes that the rally in emerging markets bonds will continue, but sees rising risks. Edmond de Rothschild Asset Management is not only optimistic, but also very courageous: the experts there rely on Venezuela and Turkey despite the political chaos. In general, they recommend government bonds in hard currency, but also see opportunities in corporate bonds, some of which are very cheap.

More: Due to the impending trade war, the markets are particularly vulnerable. The fear leads to losses on the stock exchange.



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