U.S.-China tariffs tiff saps emerging market bond rally: UBS debt chief

NEW YORK (Reuters) – U. S. President Donald Trump’s tariffs confrontation with China may force global bond investors to rethink exposure to emerging markets despite robust 2019 gains, according to a Wall Street portfolio manager of $17 billion of emerging markets (EM) fixed-income.

Federico Kaune, head of EM fixed income at UBS Asset Management, also said on Monday in an online interview that central-bank officials in developing countries likely have little scope to combat slowed cross-border commerce with rate cuts.

The following are excerpts from the Reuters Global Markets Forum chat:

Question: How have the trade disputes affected emerging economies, where debt investors had total returns as measured by the JP Morgan EMBI index of nearly 7% during January, February and March?

Answer: Negatively. The premise at the beginning of the second quarter was that the trade disputes between the U.S. and China were going to get resolved. But now the risk scenario is becoming the baseline scenario. Hence, EM economies and their assets are likely to underperform our previous expectations.

Q: How have you shifted investments?

A: If the trade disputes are not resolved soon, and if the trade war escalates, then China will likely grow less, together with the rest of the world (particularly Asia and Europe), and that lower growth will affect global trade volumes and also commodity prices. We are far more defensive now … We increased duration in portfolios as UST (U.S. Treasury) yields started to rally earlier in May.

Q: What can EM central bankers do, if the crisis continues?

A: Central banks will probably try to lower rates where they are high or keep them low where there are already low. But there are limits. If there are risk-aversion episodes, as a result of the trade disputes, then EM central banks may not be able to lower rates further.

Q: Is it time for investors to look at Venezuelan debt?

A: Venezuela is not a poor country resources wise, but it needs a resolution to the current political and economic crisis for bonds to recover. Recovery rates could be in 50s or more once everything is said and done, assuming that the econ/pol crisis is resolved favorably. But it could take further until that happens.