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China slowdown much more a concern Pioneer

Added 12th December 2014

China's slowing GDP growth is much more a concern for Asian markets than the impact of likely rise in US interest rates, according to Andrew Feltus, senior vice president and portfolio manager at Pioneer Investments.

China slowdown much more a concern Pioneer

Market talk often centers on the impact of a US interest rate hike and whether certain Asian countries will be negatively impacted by capital outflows as they were during the taper tantrum.

Feltus believes the larger risk is the accumulating debt of Chinese property companies because in high yield products, most of the issuances are from Chinese property.

Feltus, a director of high yield bank loans at Pioneer Investments, has concerns over slowing GDP growth, the banking system and its consequent impact on leveraged housing companies.

“Investment spending in China has gone up to 42% from 25% over the last ten years. And at the same time, there is a huge credit built-up,” he said in an interview with Fund Selector Asia.

“We have a couple of Chinese companies in the portfolio, but we are generally not aggressive in China.” 

The US-based investment manager said in a report that on its risk map a credit crunch in China could be highly impactful on risk assets. However, he believes Chinese authorities are smoothly managing the credit deleveraging and the overall probability of a credit crunch is low.

Feltus, who manages the $3.6bn Luxemburg-domiciled Pioneer Global High Yield fund, has allocated about 2-3% in Asian markets.

In terms of his strategy, the manager said he is overweight the US due to reasonable valuations and also because of strong potential growth. 

“We are de-emphasising emerging markets and are pulling it back now. We are much more country focused. The strategy is either to find good companies or avoid bad countries,” he said.

The case for India's rupee

The manager said he prefers Indian currency exposure rather than corporate bonds, which appear rich in terms of valuations.

His constructive view on the Indian rupee is linked to the Reserve Bank of India’s measures in cooling down domestic inflation, along with the increasingly supportive environment for foreign direct investment.

Recently, RBI governor Raghuram Rajan left interest rates unchanged for a fifth straight occasion, but said a change in the monetary policy stance is likely early next year should improvements in India’s inflation and fiscal health continue.

The new government under the leadership of Prime Minister Narendra Modi looks promising enough to initiate the much needed reforms for boosting economic growth and reducing the fiscal deficit.

“We are fans of Modi. I think the central bank and the government have built up more credibility in terms of both monetary policy and the fiscal side. If you have reforms, then that gets growth going and then you can address the fiscal deficit.”

Impact of US rate rise 

With the US Federal Reserve on course to hike rates, Feltus sees the US dollar emerging strong, but ruled out any adverse impact on the Indian and Indonesian currencies on the scale of what happened during the taper tantrum in 2013.

“Clearly, we are in a very strong dollar environment. As the Fed tightens, that dollar story will continue. The Fed is only going to raise rates if the growth is strong.”

Compared to 2013, the Indian and Indonesian governments are in a better position. They have been taking measures to improve their current account and fiscal positions. Furthermore, the recent fall in crude oil prices is seen helping these oil-importing countries in reducing their subsidy bills and inflation.

“Indian and Indonesian currencies have actually appreciated this year while others are a pretty negative story. China slowing is far more of a risk for markets than [rate hike impact on] India and Indonesia.”

Non-liquid Asia

According to Feltus, a lack of a liquid market is a big challenge in Asia, which constrains trading opportunities.

“Liquidity is the biggest challenge in Asia. The problem with Asia is it is much more like you buy and hold instruments. If there is a deal today, six months later you will not see it trading.”


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