A broker reacts while looking at financial data on computer screens. (Photographer: Luke MacGregor/Bloomberg)

Where Europe's Biggest Fund Manager Is Putting Its Cash (And Where It’s Avoiding)

(Bloomberg) -- The rising-dollar trend that inflicted so much damage on risk appetite in 2018 is all but a thing of the past, according to Amundi Asset Management.

And that can only be good for emerging markets.

“The two macro threats -- basically the dollar and higher interest rates coming from the U.S. -- are basically diminished and they are behind us,” Pascal Blanque, group chief investment officer for Amundi, said in an interview in Singapore. “There is room moving forward for an appreciation of most currencies in the emerging-market space. So this is a piece of good news.”

Europe’s largest asset manager, which oversees $45 billion in emerging-market assets, joins a raft of banks and investors, from Morgan Stanley to Goldman Sachs Group Inc., that are betting an easing of trade tensions and a less hawkish Federal Reserve will revive developing economies after a torrid 2018. The MSCI Emerging Markets currency index has risen 1.9 percent in January, headed for its biggest monthly advance in a year.

Where Europe's Biggest Fund Manager Is Putting Its Cash (And Where It’s Avoiding)

Still, the threat posed by a strengthening dollar and rising U.S. rates has now been replaced by concern over global growth. And that makes India, Russia and Chile better bets among the emerging markets because they’re likely to fare better than those with weaker fundamentals, according to Amundi.

Amundi also likes stocks and bonds in China, Indonesia, the Czech Republic, Brazil and Peru, according to Blanque. They offer high-yielding currencies with sustainable levels of debt and earnings growth as well as the monetary and fiscal capability to counter a cooling of their economies, he said.

Read more: World’s Largest Funds Bet on Nascent Emerging-Market Rally

When it comes to markets to avoid, Amundi is looking at the balance-of-payments as a key metric, shunning Turkey. It’s also guarded on South Africa and Argentina because of their deficits, Blanque said. Countries such as Argentina, South Africa and Nigeria also face risks from the upcoming elections, he said.

Below are some of Blanque’s views shared in the interview:

  • Emerging markets were the first to be hit by higher interest rates and a stronger dollar 10 months ago. They would be the first to emerge as an opportunity
  • Amundi favors countries where central banks have scope to cut interest rates to counterbalance signs of a slowdown
  • “Assuming that we don’t enter recession in the U.S., slowdown is good news” because it would mean the Fed is more likely to pause in its tightening cycle. A full-blown recession would be a challenge for emerging markets
  • Earnings growth in emerging markets could be in the region of 5 percent to 7 percent on average this year
  • Amundi has rebalanced portfolio to domestic versus trade-related themes in equities portfolios
  • On the U.S.-China trade talks, “I’m not expecting something really bad. At the margin I would expect probably more positive signs than feared”
  • The firm is cautious on Mexico because of the issue on the border wall, which could have “bad outcomes” such as the deterioration of relations with the U.S.
  • Not worried over India’s elections as fiscal reforms are on track

©2019 Bloomberg L.P.