Nomura Asset cuts EM bets on trade woes

Nomura Asset Management Co is cutting positions in emerging markets as it sees rising US interest rates, the dollar’s strength and America’s protectionist trade policy as risks for their economies.“We have slightly reduced our bets,” said Shigeki Sakaki, chief strategist at the Tokyo-based money manager that oversees ¥47tn ($422bn). “Both emerging-market stocks and bonds will face difficulties over the next one year.”Last quarter’s sharp selloff has left global money managers divided on the outlook for emerging-market assets, even as prices have shown some signs of a recovery this month. While Nomura, Morgan Stanley and Man GLG remain wary, others including Goldman Sachs Group Inc and BlackRock Inc say rising corporate profits and strong fundamentals will help developing markets outweigh risks from a trade war.The MSCI EM Index of shares has risen 0.5% so far in July after tumbling 8.7% in the April-June period, the most since 2015. A Bloomberg Barclays gauge measuring returns from local-currency EM government bonds is down 0.3% this month, adding to its 5.9% loss last quarter.Sakaki said that Japanese investors – who in general were keen to invest in emerging markets around the start of the year – are holding back now, deterred by the dollar’s surge and views that the Federal Reserve will continue to tighten monetary policy into 2019. “Investors will shift back their focus to emerging markets when the Fed ends monetary tightening,” he said. Interest may pick up when the impact of US tax cuts runs out by around mid-2019 and the economy starts showing signs of slowing, Sakaki said.Non-resident outflows from EM portfolios in the three months through June were the highest since the end of 2016, according to the Institute of International Finance. Fed Chairman Jerome Powell said last week the central bank will continue to gradually raise interest rates “for now.’’ Officials have pencilled in two more hikes this year after two in the first half.Here are some more comments Sakaki made during the interview: Japanese investors will probably continue to direct funds to Europe to buy bonds on a currency-hedged basis; they will seek chances to invest in Italian debt. Investors have been directing money into long-dated Japanese government bonds and that’s caused yields to decline; however, they have been buying on a limited scale as lower yields mean they will find it difficult to raise returns by investing further in that space; that makes it hard to be overweight on longer-dated bonds.Nomura Asset Management is maintaining its neutral view on Japanese stocks as it doesn’t see a sharp advance from current levels.“We had a bullish view around the start of the year, but it has changed gradually.” Looking at the business cycle, corporate profits aren’t expected to grow strongly and local macroeconomic trends are showing signs of slowing down.