Shanghai-based Fosun Group has this year moved to overweight emerging-market (EM) dollar high-yield bonds, taking the view that the US Federal Reserve will be reluctant to raise interest rates too much too fast. It also favours European mid-market loans and safe-haven assets.
Fosun, China’s biggest privately held investment firm, manages $18 billion in fixed-income assets for the six insurance firms it owns globally.* That represents 75% of its $24 billion in investable insurance assets.
Han Tongli, chief investment officer of fixed income, currencies and commodities, said he expected a cyclical return of capital flow to EM debt, as he didn’t believe the Fed would raise interest rates too sharply. He cites as reasons for this the negative-interest-rate environment in Europe and Japan, and the fact that the US economic recovery is peaking out. He envisages two more 25-basis-point hikes this year.
A key message signalling the US economy “peaking out” is the unemployment rate, which stood at 4.9% at the end of February, Han told AsianInvestor. That is the lowest since the 2008 global financial crisis, indicating a level close to full employment in the country, so there is now little room for further growth on the supply side, he noted.
On the demand side, Han said household demand in the US was largely supported by the positive wealth effect from gains in the domestic equity and property markets fuelled by monetary easing policy. Raising rates too much too fast would hit consumer demand, which is another reason why he saw the Fed being cautious on hikes.
Against this backdrop, Han expects to see increased flows into EM debt and has raised his allocation by 5 percentage points, but declined to reveal the current exposure. At the end of last year he started buying more dollar HY bonds in markets such as Brazil, India, Indonesia, Russia and Turkey. The current monetary-easing environment will benefit these economies, which need money and enjoy strong domestic demand, he said.
He is also upbeat on local-currency EM debt, but is buying dollar bonds because he said he could not take too much risk, as he is managing insurance assets.
Han likes European loans (in euro) because small companies are increasingly having to turn to the market for funding, given that banks are having to curb their lending. Direct lending in Europe is still in a nascent stage, so the imbalance between demand and supply presents a huge opportunity in the market, he noted. Han plans to hold such loans for at least five years.
Han saw the recent monetary-easing moves in Europe and Japan as using up monetary ammunition and said he didn’t believe either the European Central Bank or Bank of Japan would continue to cut interest rates, as doing so would harm banks and financial institutions there.
Overall, he is fairly pessimistic about fundamentals in developed economies and does not expect a positive turnaround any time soon.
Han said he expected investment flows into EM debt and safe assets to continue over the next six to 12 months. But he is closely watching three key issues: China’s reform process, the oil price and political risk in Europe.
In respect of China, he is considering what the benefits would be from any potential domestic reforms, and how they would be presented.
With regard to oil prices, many of the world’s biggest real-money investors are sovereign funds of oil-producing countries. When these nations suffer a drop in income because of the fall in crude prices, their governments seek to draw down sovereign wealth assets, which in turn seek to take profits from certain investments. That explains the big sell-off in equities in the US and Europe early this year, Han said. The low oil price also adversely affects EM debt, he added.
He saw two major political risks in Europe. One is the possibility of a British exit from the European Union – or 'Brexit'. But he said he didn’t think this would happen, as it would not be a good result for either side, a view echoed by other investors such as Jan Dehn of UK fund house Ashmore. Han said he expected rational thinking and commercial interest to outweigh nationalistic sentiment. The other risk he sees in Europe is Catalonia’s push for independence from Spain.
Han is also chief executive for Fosun Asset Management, which runs the group’s insurance assets. Its six insurance firms are Fosun Insurance Portugal, the biggest insurer in Portugal; Yong’an P&C Insurance and Pramerica Fosun Life Insurance, both in China; Hong Kong-based Peak Reinsurance; and two US players, Ironshore and MIG.