Emerging Market Jitters Have $54 Billion Daiwa SB Fund Selling

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(Bloomberg) -- Cash is king in times of stress.

That’s how Daiwa SB Investments Ltd.’s Takeshi Yokouchi is playing the recent rout that has seen emerging-market assets erase their 2018 gains -- selling positions and raising liquidity.

He’s reducing his overall allocation to emerging markets, offloading bonds and currencies from Turkey and Indonesia, the Tokyo-based senior fund manager said in an interview. Yokouchi, who runs a fund that invests in high-yielding securities, is also increasing his dollar holdings amid the prospect of further rate hikes by the Federal Reserve.

“I am becoming increasingly cautious on emerging markets because they have been under selling pressure due to their external vulnerability amid weakening risk sentiment,” said Yokouchi at Daiwa SB, which oversaw 6 trillion yen ($54 billion) as of the end of March. “I view this as a temporary correction, but we don’t see the light at the end of the tunnel just yet so this weak environment is likely to continue for a while.”

This isn’t the first time Yokouchi is finding solace in yen-cash positions. Back in early February, when a slide in U.S. technology shares and a surge in volatility exacerbated a global selloff, he took a similar strategy.

The global end of easy money, trade tensions and geopolitical risks amid a rise in U.S. interest rates and a stronger dollar are forcing emerging-market bulls to take a more cautious stance, after two years of gains on the back of the prospect for higher growth.

While some debate the risks of contagion, the selloff has deepened in the parts of the emerging market universe where Yokouchi has cut risk.

The Turkish lira plunged to a fresh record low this week as Turkish President Recep Tayyip Erdogan revealed plans to step up his role in the country’s monetary policy if he wins elections next month.

Read more: what analysts say about Erdogan’s plan to tighten grip on policy

Foreign investors have also withdrawn a net $3.6 billion so far this year from Indonesian stocks and bonds, one of the few Asian emerging markets that is running a current-account deficit. The rupiah dropped to the lowest since October 2015 on Friday, despite Bank Indonesia’s interest-rate increase and pledge of “stronger measures” to maintain stability, while the country’s benchmark bond yields reached their highest since March 2017 earlier this month.

Here is why an emerging market rout has hit Indonesia so hard: QuickTake

Still, Yokouchi isn’t throwing in the towel completely on emerging markets, arguing that foreign reserve positions in some countries remain healthy and funds may flow into developing markets as some economies start to tighten monetary policies.

“This isn’t the beginning of a long-term correction in emerging markets,” Yokouchi said. “In some parts of EM, there may be overselling against fundamentals. When risk sentiment stabilizes, I will probably start to get back again.”

©2018 Bloomberg L.P.

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