List of emerging market currencies displayed on a screen. (Photographer: Sanjit Das/Bloomberg)

What Fund Managers Are Worried About in Emerging Asia Markets

(Bloomberg) -- From a rising dollar to an escalating trade war, emerging Asian bonds and currencies have had nothing but trouble this year. Investors in the region are bracing for more - at least in the near-term.

A series of Bloomberg News interviews with fund managers from Pacific Investment Management Co. to Amundi SA shows that trade tensions, tariffs and elections are still seen as the main headwinds to Asian markets. What happens in China will be key, with some holding out for a stabilization in the yuan, while others say Asia’s strong economic fundamentals will offer a buffer to any volatility.

Here is what eight portfolio managers with Asian investments see in store for emerging Asian FX and bonds:

Pimco

Roland Mieth, emerging markets portfolio manager in Singapore at Pacific Investment Management Co., which oversees $1.71 trillion:

  • EM Asia is at a crossroads in terms of risk appetite, with the trade dispute, broad dollar moves, Federal Reserve tightening and expected China growth slowdown the key drivers from now and into 2019
  • How global sentiment evolves over the next 6-12 months will depend a lot on extent to which China succeeds in easing liquidity conditions, supports growth and allows a weaker CNY without triggering capital outflows
  • Co.’s positioning in Asia FX and rates “remains relatively light and tactical in nature. We have a constructive view on fundamentals for most countries across the region, and recognize the cheapness that has been created in 1H”
  • Forward guidance by the European Central Bank and the Bank of Japan, coupled with the fact that inflation is likely to undershoot for longer, will keep European and Japanese rates relatively low for longer, and cap the rise in EM Asia rates

Amundi

Esther Law, a senior emerging-market debt manager in London at Amundi SA, which oversees the equivalent of $1.67 trillion:

  • “It is too early to tell if the whole EM has turned the corner. There are still many headlines risks regarding trade wars, sanctions and election risks generally speaking and these are likely to keep EM FX and government bonds on their toes in the near term”
  • “Further headline risks on trade wars, higher core yield and stronger USD are key threats to Asian FX & bonds. We try to keep an overall duration short and focus on relative value bets on EM FX”
  • Co. increased EM Asian exposure recently after China’s yuan stabilized
  • Indonesia is co.’s top pick for EM Asian FX and govt bonds

Fidelity International

Eric Wong, Hong Kong-based fixed-income portfolio manager at Fidelity International which oversees $431 billion:

  • EM Asia will be supported by accelerating China stimulus as authorities respond to a faster-than-expected slowdown in growth
  • Still, region hasn’t reached turning point with multiple risks over the next 3-6 months, including upcoming mid-term U.S. elections which may exacerbate the trade war
  • Favors Malaysian government bonds and local Chinese corporate bonds
  • “Philippines is certainly a market that concerns us. Inflation is surprising on the upside and growth is not as encouraging. The central bank did the right thing last week by raising policy rates by 50bps, but it is still behind the curve given where they are in the cycle and about the inflation dynamics”

State Street

Ng Kheng Siang, Singapore-based Asia Pacific head of fixed income at State Street Global Advisors which manages nearly $2.73 trillion:

  • There’s been some stabilization in most EM Asia local currency government bond markets although this can be quickly disrupted by developments such as a weakening in Turkey’s fundamentals
  • Says main threats are a “sudden change in global risk sentiments, currently trade tariffs development is key, sudden shift in policy calibrations by governments and central banks that take the markets by surprise”
  • “EM currencies are still facing headwinds with risk sentiment broadly still having negative tint”

Read more about investors’ outlook for Asian markets here

AllianceBernstein

Yoo Jae Heung, Seoul-based senior portfolio manager at AllianceBernstein which manages $540 billion:

  • Near-term difficulties include a strengthening dollar due to rising U.S. interest rates, escalation of U.S.-China trade war and political uncertainties in some emerging economies
  • Compared to the taper tantrum in 2013, emerging markets’ mid-to-long term fundamentals remain positive, given favorable global economic growth projections

Aviva

Stuart Ritson, Singapore-based head of Asian rates and FX at Aviva Investors, which manages more than $482 billion:

  • “EM Asian FX and rates have already significantly repriced in recent months resulting in attractive valuations in several markets. But, concerns around the broader EM universe are likely to dampen risk appetite in the near term”
  • Still, any contagion from other regions will probably be transitory given the relatively strong fundamentals of Asian economies
  • Cross-border outflows from some higher yielding Asian markets such as Indonesia and India have stabilized in recent weeks, suggesting this will be less of a headwind

Deutsche Bank Wealth Management

Tuan Huynh, chief investment officer for Asia Pacific at Deutsche Bank Wealth Management in Singapore:

  • EM Asia FX are likely to stabilize further for the rest of the year as dollar strength will be modest, Asia’s economic fundamentals are largely resilient and China’s onshore yuan will be stable with central bank intervention
  • China government bonds to be supported by monetary easing while sovereign debt of some other EM Asian economies will be affected by interest-rate hikes amid higher inflation and market volatility
  • Contagion risks from Turkey will be limited as the euro zone’s exports to Turkey account for less than 0.6% of GDP; total exposure of banks in Spain, France and Italy with the largest claims in Turkey is 135 billion euros or 6% of their exposure to euro zone countries and so the fallout is unlikely to cause a euro-zone credit crunch

Oppenheimer Funds

Krishna Memani, New York-based chief investment officer at OppenheimerFunds Inc. which oversees more than $249 billion:

  • Downside from trade war is limited and the U.S. will face some pressure by mid-term elections to resolve the issue as the dispute starts hurting its economy
  • Without the trade issue, EM assets “would be meaningfully higher” amid decent growth, stable policy and attractive valuations
  • “We continue to like EM govt bonds and FX asset in general and are more focused on countries like Brazil, Argentina, Indonesia. The biggest underperformer in EM has been and likely to remain Turkey where politics is trumping economics and the economic policy environment is getting very dire”

©2018 Bloomberg L.P.