Emerging-Market Investors Don’t Expect an Olive Branch in Trade Talks

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(Bloomberg) — Trade war-hardened emerging-market investors aren’t counting on any breakthrough in trade negotiations as talks between the U.S. and China are set to resume Thursday in Washington.

BNP Paribas (PA:) Asset Management has been reducing its exposure in junk-rated debt, while Union Investments Privatfonds GmbH is favoring investment-grade rated bonds over high-yield debt. And in case any breakdown in discussions triggers a flight to safety, Aviva (LON:) Investors has been been buying the yen.

“We expect another empty-handshake meeting,” said Bryan Carter, London-based head of emerging-market fixed-income at BNP Paribas Asset. Ultimately, no substantive agreement will be reached, he said.

Emerging-market stocks have rebounded as much as 5.8% from early September, when China and the U.S. announced they would hold face-to-face negotiations once again. The rally has since petered out after President Donald Trump said he won’t seek an interim agreement and global growth showed further signs of deterioration as the year-long trade war dragged on. Impeachment proceedings have also spurred concern that it may hinder Trump’s hand in the negotiations.

Below are comments from investors and analysts:

Sergey Dergachev, senior portfolio manager at Union Investment in Frankfurt:

  • Expectations for a breakthrough are “very low,” though it will be important to see how the meeting will end and the mood during the meeting
  • Future steps are also crucial, such as when the next round of talks will be
  • Dergachev said he’s positioned “mildly defensive,” and is focusing on the credit quality of his holdings

Werner Gey van Pittius, co-head of emerging-market fixed income at Investec Asset Management in London:

  • The trade war will last longer than what the market is hoping because it’s not just about trade. There’s an element in the U.S. that is afraid of “the geopolitical rise of China” and that is much bigger than just trade right now
  • China is preparing for the next decade and trying to reduce the impact of the trade war by opening up their markets, attracting capital, and moving away from U.S. influence by selling Treasuries and buying gold. Their time horizon is beyond the U.S. elections
  • He is taking a long duration strategy in his bond portfolio as the trade war raises the risk of a recession

Carter at BNP Paribas Asset:

  • Politics are driving the negotiations, and not economics
  • The upcoming 2020 presidential election, and impeachment investigations in the House, are the dominant context for the trade meeting
  • Carter said he plans to continue cutting exposure to junk-rated bonds even if there was a positive outcome from the meeting. That’s because the firm doesn’t expect any comprehensive agreement will be reached that would reverse the negative economic effects of the trade war

Stuart Ritson, emerging-market bond fund manager at Aviva Investors in Singapore:

  • It is hard to be too optimistic on the outcome of trade talks given the narrow scope of the discussions
  • The firm’s local-currency bond portfolio is “relatively defensive” at the moment, given the weak global growth backdrop. It is also positioned for further easing by EM policy makers and has increased exposure to the yen, given its anti-cyclical properties, and still attractive valuations

Robert Carnell, chief economist at ING Groep (AS:) NV in Singapore, writes in a note:

  • China may see it as advantageous to keep the trade war alive, but under control, pending political developments in the U.S.
  • For the U.S., the benefits of fighting China on trade may now be outweighed by the short-term hit to the economy, in terms of popular support and potential votes for Trump at next year’s presidential election
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