ADVERTISEMENT

State Street Says EM Bond Investors Should Prefer Cash

Hoarding Cash Grows in Popularity as Market Volatility Increases

(Bloomberg) -- Tumbling stock markets from China to Greece mean piling into cash may be the best bet for emerging-market investors as a volatile 2018 draws to a close.

That’s according to Dwyfor Evans, head of Asia-Pacific macro strategy at State Street Global Markets in Hong Kong, who says that developing-nation bond funds should switch to cash as a sell-off widens.

“Investors have probably taken profit on the very, very easy money-making opportunities that arose in 2017,” Evans said. “When markets get tough, when markets get a bit more risk averse, it’s logical to see that investors will actually allocate a higher proportion of their underlying assets to cash.”

State Street Says EM Bond Investors Should Prefer Cash

China’s benchmark Shanghai Composite Index has slumped 21 percent this year, Greece’s benchmark has tumbled 23 percent, while the MSCI All-Country World Index of stocks slid to the lowest in more than a year on Tuesday. Sentiment is being punished by higher U.S. interest rates, a U.S.-China trade war and Italy’s budget dispute, among other factors.

CLSA Ltd. also says its time to get more defensive. The company’s New York-based strategist Matthew Sigel said he has sold all his European equity holdings due to concern about rising support for populist politicians and beefed up his cash position.

“Cash now offers positive real yields in the U.S. for the first time in years, which, should the nascent trend continue, correspond with significant equity multiple contraction,” he wrote in a company newsletter obtained by Bloomberg.

Buy Dollars

Rakuten Securities recommends buying U.S. dollars.

“Probably the safest currency from a global perspective is the dollar,” said Nick Twidale, chief operating officer at Rakuten’s Australian unit in Sydney. “The potential for more volatility in other currencies will make them less attractive, especially while we still have a hawkish Fed.”

Meanwhile, money-market funds -- the equivalent of cash -- are looking increasingly attractive, State Street’s Evans said.

“As an investor you’d also think to yourself: ‘Well I’m keeping some dry powder on the side so when I do see an opportunity, bang, I can jump on it,” Evans said. “There’s an element of protection there now as we head into the fourth quarter.”

--With assistance from Andrew Janes.

To contact the reporters on this story: Ruth Carson in Sydney at rliew6@bloomberg.net;Kartik Goyal in Mumbai at kgoyal@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Nicholas Reynolds

©2018 Bloomberg L.P.