This China Bear Sees Reprieve for Emerging Market Currencies

  • Counterpoint's Barker says investors exiting bearish bets
  • Hedge-fund manager made money from rupiah, ringgit surge

Geoffrey Barker, a HSBC Holdings Plc economist-turned-hedge fund manager, said emerging-market currencies will remain stable or gradually appreciate “for a while” because he doesn’t expect an imminent collapse in the Chinese economy.

Barker, a self-proclaimed “China bear,” said in an an e-mail that investors are exiting bearish bets in emerging-market currencies and that the roughly $160 million Counterpoint Asian Macro Fund that he leads made money betting on the recent surge in the Indonesian rupiah and the Malaysian ringgit. Barker said he has closed the rupiah trade, while declining to comment further on his holdings.

“There was a classic setup for a mean reversion trade: excessive pessimism and heavy short positioning plus an overshooting in some emerging-market currencies into the cheap zone,” he said, referring to a tendency of securities prices to return to their averages. “I doubt that another plunge in emerging-market currencies is imminent because it is too soon to argue for a hard landing in China.”

The rupiah completed its best week since 2001 and the ringgit appreciated the most since 1998 last week. Emerging-market currencies and stocks rose after the Federal Reserve held off a benchmark interest-rate increase and disappointing U.S. jobs data raised expectation of further delays in raising borrowing costs in the world’s largest economy.

The ringgit lost 20 percent of its value against the dollar in the first nine months of 2015, while the rupiah declined 15 percent. The two countries’ reliance on commodities contributed to their being the worst-affected Asian economies this year as growth in China slowed. The rupiah appreciated 6 percent from the end of September to Oct. 9, the second-biggest gainer among emerging-market currencies tracked by Bloomberg. The ringgit’s 4.2 percent surge ranked it third.

"Much depends on China,” Barker said of the sustainability of the rally. "Provided the Chinese economy continues to muddle along and does not have a real hard landing, then the case for a large devaluation of the yuan is not strong. More stability would lend support to Asian currencies.”

Some money managers remain bearish. Yip Ka-hay, chief investment officer of Hong Kong-based macro hedge-fund manager Bright Stream Capital Management, has a small bet against the rupiah and is not trading the ringgit.

The ringgit fell the most in almost three weeks on Monday after Fed Vice Chairman Stanley Fischer said a U.S. rate increase is still on the cards this year.

Sam Diedrich, a director at Pacific Alternative Asset Management Co., which oversees about $9.5 billion in hedge-fund investments, warned last month that hedge funds were piling into bets that the dollar would gain against emerging-market currencies, and the popularity of the trade would fuel volatility in those currencies should such funds adjust their positions.

China in August announced the first major devaluation of its currency since 1994, raising the specter that other emerging-market countries would have to follow to keep their exports competitive.