Warning On Emerging Markets Given By Wall Street Vets From Dalio To Gundlach

In warning that risky assets are overvalued, more investors are joining the cast of Wall Street veterans from Jeff Gundlach to Ray Dalio.

The valuations that no longer compensate for potential flareups in North Korea and Venezuela, the racially-charged violence in Charlottesville, Virginia, as well as the recent terrorist attacks in Barcelona were pointed out by them as factors for rising global turmoil. And the ensuing fued and the unpredictability in the U.S., where President Donald Trump is feuding with members of Congress before a critical vote to increase the country’s debt ceiling, is also beong gheld responsible.

Emerging-market bonds, for only the third time in history are yielding less than U.S. junk debt, are also under scrutiny among other assets. Advising investors to reduce risk by trimming holdings of developing-nation assets are some of the world’s largest money managers, from Pacific Investment Management Co. to T. Rowe Price Group Inc.

“Geopolitical risk remains high, particularly in the U.S.,” said Chris Diaz, who oversees about $2 billion as a money manager at Janus Capital Management in Denver. “Valuations in all risk markets, including EM, are fairly full in our view and this would be a reasonable time to reduce risk.”

Traders should be gradually “moving toward exits” on riskier securities, Gundlach, the co-founder and chief executive officer of DoubleLine Capital, said earlier this month.

As a surge in populism around the world has helped intensify existing conflicts “to the point that fighting to the death is probably more likely than reconciliation”, Dalio, founder of Bridgewater Associates, said Aug. 21 that he’s tactically reducing risks.

The current economic was compared to social divide to 1937, two years before the start of World War II by the billionaire hedge fund manager, who has recommended gold as a hedge against rising political risk.

“Populism emerges, democracies are threatened and wars can occur,” Dalio wrote in a post on LinkedIn. “I can’t say how bad this time around will get. I’m watching how conflict is being handled as a guide, and I’m not encouraged.”

A rally in risk assets, spurred by low interest rates and loose monetary policy, would end in a “self-reinforcing downturn”, brought out references of 1937 two years ago from Dalio when he cautioned about that rally in risk assets. Later in the year, 5 percent drop in emerging-market dollar bonds and a 12 percent dip in the S&P 500 Index happened.

The firm sees risk in South Africa, Brazil and Turkey, where the economies haven’t undergone the changes they need to improve potential growth, said Chase Muller, a portfolio manager who oversees about $600 million at One River Asset Management.

Markets have become heated and risky, Howard Marks, the co-chairman of Oaktree Capital Group, cautioned in a 22-page memo last month.

He wrote that debt repudiation, , devaluation, institutionalized corruption and coups happen when investor confidence declines resulting in such risks in developing nations. Argentine bonds that mature in 100 years despite the nation’s history was being bought by trader and Marks scorned such traders as a chronic defaulter.

“It’s a sign of the times: ‘Something may go wrong, but probably not too soon,’” he said

(Adapted from Bloomberg)

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Categories: Economy & Finance, Uncategorized

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