Investors now see Chinese assets, including the yuan and government bonds, as likely to perform poorly.This year, changes in the Federal Reserves stance could favor emerging markets, except for China.
Recent data show Chinas economy, the worlds second-largest, continues to slow.This scenario prompts the Peoples Bank of China (PBOC) to consider rate cuts.
Yet, investors think the PBOC has less room to lower rates compared to other major economies.Ken Cheung, a chief strategist at Mizuho Bank in Hong Kong, believes the yuan will face short-term pressure.
He expects bonds to get some support from the PBOCs easing policies.However, he also notes the limited scope for rate reductions due to the yuans depreciation pressure and Chinese banks narrow interest margins.Doubts Over Chinese Invaestments Grow.
(Photo Internet reproduction)Emerging market currencies are becoming less correlated with the yuan, hitting a three-year low.
As Chinas appeal wanes, traders see reasons to favor other emerging markets.These markets could gain more from the Federal Reserves expected rate cuts.
Also, the potential inclusion of South Korea and India in major global bond indices could boost their assets further.Last week disappointed investors, with the PBOC not changing its one-year reference rate.Prime Minister Li Qiangs comments on economic expansion without massive stimulus have also dampened hopes for more policy support.The offshore yuan has weakened by more than 1% this year, after a nearly 3% drop in 2023.Rajeev De Mello from Gama Asset Management prefers local currency bonds and currencies from countries like Brazil and Mexico, where interest rates have preemptively risen and inflation is on the decline.JPMorgan Asset Management sees the yuans basket as likely to weaken in the first half of the year.They are searching for relative value opportunities, according to Julio Callegari, their Asia fixed income director.Economists predict the yuan will recover some losses but still underperform against its Asian peers.
Bloomberg surveys anticipate a 3.1% drop in the offshore renminbi against the dollar by year-end.Simon Harvey from Monex Europe sees the yuan as quite uninspiring in the current strong dollar environment.Chinese government bonds have done well so far, with yields dropping.
Yet markets are now looking for countries with higher yields, set to benefit from a shift toward monetary easing.Chinas 10-year yield stands at about 2.5%, low compared to Indias 7%, Mexicos 9%, and Brazils 10%.Edmund Goh from ABRDN Plc finds higher yields in India and Indonesia more attractive, viewing Korean bonds as appealing proxies for United States Treasury bonds.South Koreas 10-year yields are highly sensitive to changes in United States Treasury bonds, suggesting South Korean bonds could outperform as the Federal Reserve begins easing.