A serious risk manager, Rick Rieder of BlackRock, admits in a TV and online interview that he has cut his exposure to emerging markets sovereign debt by 50% (from 17% in late February to about 7% today).
In this article, Reider “said the shift down in emerging markets exposure comes as liquidity drains out of the bond markets and with the U.S. Federal Reserve poised, he said, to stop reducing its bond holdings and to signal a move toward the end of that balance-sheet reduction policy as soon as September.”
Well, if that’s true, then U.S. rates will trend higher, the dollar will grow stronger, funds will flow out of EMs, and a big move out of EM bonds is smart. Yet, none of it may be true.
The Fed may persist in tighter monetary policy for reasons that have nothing to do with EMs. The slowing effect on the U.S. economy might cause the Fed to reverse course by late this year, ease monetary policy explicitly (by skipping rate hikes in September or December), lower the exchange rate of the U.S. dollar, and make the EMs attractive markets again.
I’m not sure which will happen, but it is clear that the Fed could go either way (depending on evidence) and that a rally in EMs is just as likely an outcome as a crash. Better to maintain a large allocation to cash (about 30%), remain nimble, watch the news, and be prepared to pounce quickly when the situation is a bit more clear.
The article ends by saying Rieder’s fund is up 1.6% in the past year; “a bit ahead of average.” That’s fine; congratulations to Rick Rieder. Let’s see where we are a year from now.
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