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Goldman Sachs AM cuts EM bond exposure

Worsening US-China trade tensions cause the asset manager to cut back holdings of risky assets


Goldman Sachs Asset Management (GSAM) said it has scaled back its overweight position in emerging market currencies and emerging market debt until sees greater clarity on the direction of travel for both US-China trade relations and global growth, which it sees as interconnected.

The firm manages two large funds dedicated to the asset class, both registered in Luxembourg:  the $7.69bn GS Emerging Markets Debt Portfolio Base Fund and the $1.37bn GS Emerging Markets Corporate Bond Portfolio Fund.

The funds’ biggest regional allocation is to Latin America, followed by Asia-Pacific.

It is unclear where the funds will reallocate the proceeds from the planned asset disposals. Both funds already had 6.8%  parked in short-term money market instruments as at 30 April, according to FE Analytics data.

The fund managers are based in London and could not be reached for comment.

Shifting outlook

Earlier, GSAM had included an improving trade backdrop as one of three factors that would stabilise economic growth this year.

“This assessment has clearly shifted,” following the imposition of further tit-for-tat tariff this month, said the statement.

Other emerging market bond fund managers had also turned more sanguine about emerging market bonds, predicated on an improving macroeconomic environment and while asset prices were rebounding from last year’s sharp falls.

For instance, Christopher Watson, who co-manages the Principal GIF Finisterre Unconstrained Emerging Markets Fixed Income Fund, told our sister publication FSA in April that, “the major macro-concerns that shook asset prices last year — namely the Sino-US trade dispute and a series of US interest hikes — have subsided as dominating factors”.

He was also encouraged by the “various stimulus packages in China that should support economic activity in the rest of Asia”.

Perfect storm seen

Ken Hu, co-manager of the Invesco Asian Bond Fund was even more optimistic, told FSA that a perfect storm of a finalised US-China tariff deal, renminbi appreciation, investment inflows and domestic reforms would drive Chinese bond prices higher.

However, emerging market bond prices in nearly all regions, as represented by JP Morgan EMBI indices, have declined this month.

The  exception is Europe, where Russia sovereign bonds continue to attract buyers because of rising oil prices and a strengthening ruble. The resilience of the Europe sub-sector has been sufficient to prevent a sharp fall in the broader index, which is flat for the month (see chart below).

GSAM believes that the other two factors underpinning global growth – a “patient US Federal Reserve” and monetary policy easing in China — remain in place.

But, the escalation of the trade conflict is now dominating investor sentiment about both the outlook for growth and the prospects for emerging market bonds.

The JP Morgan emerging market bond indices and emerging market fixed interest sector average

Source: FE Analytics. Gross returns in US dollars over one year

GS Emerging Markets Debt Portfolio Base Fund vs JP Morgan EMBI Global Diversified index and sector average

Source: FE Analytics. Three-year cumulative performance in US dollars

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