(Bloomberg) -- For some emerging market funds, Asia’s beaten-down assets aren’t yet cheap enough.
Portfolio managers aren’t rushing out their checkbooks to gain exposure to the fast-growing region, even as high-yielding currencies such as India’s rupee languish near record lows. Instead, they’re positioning for further weakness, with the U.S.-China trade war and a strong dollar expected to remain persistent themes.
“We are biasing our exposure to the dollar,” said Manu George, director of fixed income in Singapore at Schroder Investment Management Ltd., which oversees $593 billion. “We have not been constructive for a few months on Asian FX and hence we are staying put for now.”
Emerging currencies and bonds extended losses this quarter as Argentina’s credit woes and Turkey’s lira turmoil fueled fears of contagion. A stronger greenback is adding to the stress, with the Bloomberg Dollar Spot Index climbing to the highest in over a year last month amid bets that U.S. interest rates will continue to rise.
The Indian rupee and Indonesian rupiah are pacing declines in Asia, as the U.S.-China trade row clouds the outlook for money managers. The U.S. imposed further duties on another $200 billion in Chinese goods on Monday, and China said negotiations to better the situation won’t take place as long as President Donald Trump continues to threaten more tariffs.
“The trade war has some length to go and could lead to further weakness in the Chinese renminbi,” said Alexander Zeeh, chief executive officer of S.E.A. Asset Management in Singapore. “As a result I would expect other Asian central banks to be in favor to weaken their currencies in tandem to remain relatively competitive with Chinese exports. This is the main reason I would avoid most Asian FX local currency bonds.”
Exceptional Thai Baht
Not everyone is negative on the region.
“In this environment of increased emerging-market volatility, past experience shows us that Asia FX could act as a safe haven,” said Anders Faergemann, a London-based fund manager at PineBridge Investments which oversees $87 billion globally. “We’re still optimistic on emerging markets from a fundamental perspective.” PineBridge increased its exposure to Thailand’s baht, while it also favors other EM currencies which it says are undervalued, including the Mexican and Colombian pesos.
Read more: As Emerging Markets Rebound, Skeptics Are Getting Harder to Find
Nikko Asset Management Co., which manages $216 billion globally, agrees that the baht will remain resilient but advocates broader patience as the drag from the trade war outweighs the attractive valuations on Asian bonds.
“We are not increasing exposure at the moment as we think that the current weak market sentiment driven by ongoing trade tensions could linger for a while,” said Edward Ng, a fixed-income portfolio manager in Singapore at Nikko Asset. “Given the vulnerable sentiments in EM, we have been cautious in this space, particularly on countries with weak external balances.”