Bridgewater's Research Chief Sees Bunds Slumping, EM Gaining

(Bloomberg) -- Karen Karniol-Tambour, head of investment research at Bridgewater Associates, sees German bonds slumping and the euro’s rally against the dollar coming to an end.

For European bonds, “there’s really no tightening that is priced in, and so it’s sensible for those assets to keep underperforming as the economy picks up,” and German bunds may be the most vulnerable, she said Thursday in a Bloomberg Television interview. In Germany, the bond market has been squeezed most tightly by the European Central Bank’s “massive buying. That is where there’s the least supply relative to what the buying has been like.”

While growth in Europe is picking up, the U.S. economy is also accelerating and has a sharper degree of monetary tightening ahead of it relative to the euro area, Karniol-Tambour said. As a result, she doesn’t see the euro’s rally against the dollar continuing.

Still, the market’s perception of Bridgewater’s wagers in Europe are off-base, she said. The firm has amassed a $19.65 billion gross short position against some of Europe’s biggest stocks, as disclosed in regulatory filings, but it’s “a very, very thin slice that doesn’t really represent the holistic set of positions,” she said.

Outside of the developed world, Karniol-Tambour said Bridgewater likes assets of emerging markets, whose economies have “a very long room to run” and little dependence on foreign cash. Investor interest in emerging markets -- where benchmark equity and bond indexes surged 34 percent and 10 percent, respectively, last year -- is only now starting to pick up, she said. In particular, money managers should be turning their eyes to China.

“There are not that many large liquid economies that have independent central banks, independent credit systems,” she said. “That’s starting to happen in China. It’s a very important development that investors aren’t paying enough attention to.”

Karniol-Tambour also reiterated the views that Bridgewater’s billionaire founder, Ray Dalio, expressed in a LinkedIn post earlier this week on the tariffs proposed by President Donald Trump, saying the impact will be small at this point. Bridgewater, based in Westport, Connecticut, is the world’s biggest hedge fund.

“The immediate things being discussed are not the issue -- they’re small, they’re contained,” Karniol-Tambour said. “What’s important is, does this spiral and become more of a global trade war, with lots of activities like this adding up and fundamentally changing the global trade system.”

©2018 Bloomberg L.P.