China’s official numbers show a slowdown in GDP growth to roughly 7% from 8-9%. “That doesn’t seem like a big deal, but the markets don’t really believe the official numbers.”
To measure growth, M&G uses Citigroup’s Li Keqiang index, which looks at factors like electricity consumption and bank loan growth rates.
The Li Keqiang index shows GDP growth at or just below 5% this year.
“If you invest in high yield products in real estate or property developers or shadow banking, you can get 6-7% absolute returns. But the slowdown in growth is more than the official numbers show, and certain dynamics might push companies or sectors away from the potential to draw credits. We might see more defaults than in the past.
“Banks are providing less lending and companies in China are really leveraged, so the average investor in fixed income in China is not well compensated [for risk].”
He also believes that the central bank could have a hard time encouraging liquidity through interest rate cuts.
Moreover, growth in some other Asian markets is dependent on China’s demand for raw materials and commodities.
“If China’s growth falls below the officials numbers, it will be a problem for the long term growth of some emerging markets. We are very bearish on the China story.”
Carpaneda was more bullish on developed markets, particularly US corporate bonds.
“The decrease in oil prices has brought [what is essentially] a $125bn tax cut, lining the pockets of US consumers. That has not yet made its way to the US market. US credit will strongly benefit from the boost in consumption. The longer credit spread duration should benefit both investment grade and high yield.”
The concern about developed markets is that political risk is not priced in. For example, the market has not made adjustments to the risk of UK elections driving currency volatility or the possibility of Greece leaving the euro.
By comparison, political risk has been factored in to Russian fixed income products.
“Emerging markets have done much better. Whether political risk or positive impact, it is already reflected in the price. What is concerning about developed markets is that nobody is discounting for political risk.”
