Wall Street veterans signal warning on emerging market risks

Emerging-market bonds are currently yielding less than U.S. junk debt

Aug 28, 2017 @ 5:22 pm

By Bloomberg News

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

They point to rising global turmoil underscored by the recent terrorist attacks in Barcelona and the racially charged violence in Charlottesville, Virginia, as well as valuations that no longer compensate for potential flareups in North Korea and Venezuela. That's not to mention 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.

Among the assets under scrutiny are emerging-market bonds, which for only the third time in history are yielding less than U.S. junk debt. Some of the world's largest money managers, from Pacific Investment Management Co. to T. Rowe Price Group Inc., are advising investors to reduce risk by trimming holdings of developing-nation assets.

(More: Emerging markets attract big gains, but should investors stay?)

"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."

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

Dalio, founder of Bridgewater Associates, said Aug. 21 that he's tactically reducing risk 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." The billionaire hedge fund manager, who has recommended gold as a hedge against rising political risk, compared the current economic and social divide to 1937, two years before the start of World War II.

"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."

(More: How advisers can better communicate the risks and rewards of investing in emerging markets)

Two years ago, Dalio also referenced 1937 when he cautioned that a rally in risk assets, spurred by low interest rates and loose monetary policy, would end in a "self-reinforcing downturn." That preceded a 12 percent dip in the S&P 500 Index and 5 percent drop in emerging-market dollar bonds later in the year. (Although over the longer term, those assets have returned 18 percent and 19 percent, respectively, since then.)

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

Last month, Howard Marks, the co-chairman of Oaktree Capital Group, cautioned in a 22-page memo that markets have become heated and risky. When investor confidence declines, risks in developing nations such as coups, institutionalized corruption, devaluation and debt repudiation are exposed, he wrote. Marks scoffed at traders who are buying Argentine bonds that mature in 100 years despite the nation's history as a chronic defaulter.

"It's a sign of the times: 'Something may go wrong, but probably not too soon,'" he said.

(More: Best- and worst-performing emerging-market funds)


What do you think?

View comments

Most watched


Young advisers envision a radically different business in five years

Fintech and sustainable investing are two factors being watched closely by some of the 2019 class of InvestmentNews' 40 Under 40.


Young professionals see lots of opportunity to reinvent the advice experience

Members of the 2019 InvestmentNews class of 40 Under 40 have strategies to overcome the challenges of being young in a mature industry.

Latest news & opinion

Target-date fund design may be wrong for retirees

Researchers suggest the funds don't adequately hedge against sequence-of-returns risk in retirement.

InvestmentNews' 2019 class of 40 Under 40

Our 40 Under 40 project, now in its sixth year, highlights young talent in the financial advice industry. These individuals illustrate the tremendous potential of those coming up in the profession. These stories will surprise, entertain, educate and inspire.

New Jersey fiduciary rule: Pressure leads to public hearing, comment deadline extension

Industry push results in chance to air grievances on July 17 and another month to present objections.

Galvin to propose fiduciary rule for Massachusetts brokers

The secretary of the commonwealth is proposing a fiduciary standard in response to an SEC investment-advice rule he views as too weak.

Summer reading recommendations from financial advisers

Here are some books that will keep you informed and entertained during summer's downtime


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print