China Bull Who Beat 99% of All Bond Funds Says Yuan Drop Is Overby
Seaman sees yuan rising on average 2-3% each year over decades
He cites China's current-account surplus and dollar weakness
For an investor whose fortunes are tied to a currency that most forecasters warn is destined to decline, Andy Seaman is surprisingly upbeat.
The manager of Stratton Street Capital’s Renminbi Bond Fund says the shock devaluation of China’s currency in August -- and the raft of dire analyst predictions that followed -- have failed to shake his confidence. He expects the renminbi, also known as the yuan, to gain against the dollar by the end of 2016 and keep climbing in the years to come, buoyed by China’s current-account surplus, the central bank’s efforts to burn bearish speculators and foreign inflows into the nation’s increasingly open bond market.
While such optimism clashes with consensus estimates for a weaker yuan this year and next, Seaman’s track record as one of the world’s top-performing money managers makes his outlook hard to ignore. His flagship bond fund has returned an annualized 9.5 percent in dollar terms over the past five years, beating not only its peers in Asia, but also 99 percent of the more than 14,000 fixed-income funds tracked by Bloomberg worldwide.
“Even though people still talk about a negative story, it’s not happening," Seaman, who oversees about $1 billion, said in a phone interview from London. “The renminbi is fundamentally strong over a long period, and you get paid for owning it as well.’’
For the eight-year-old Renminbi Bond Fund, Seaman buys investment-grade dollar bonds from issuers across Asia, gaining exposure to the yuan by purchasing an equivalent amount of forward contracts. Because the Chinese currency is priced at a discount in the forwards market, the fund benefits from what’s known as positive carry. Its dollar-denominated share class has gained 5.7 percent so far in 2016 as the yuan strengthened 0.8 percent in Hong Kong’s offshore market.
Despite the currency’s recent resilience, many analysts are convinced it will resume sliding. The yuan will end the year at 6.73, according to the median estimate in a Bloomberg survey, compared with 6.5093 in the Shanghai spot market as of 5:34 p.m. on Tuesday. Many see depreciation as inevitable as funds leave the nation amid monetary easing and the slowest growth in 25 years. Bloomberg Intelligence estimates that $1 trillion of capital left the nation last year.
Even AllianceBernstein LP, which also offers one of the top-performing offshore yuan funds, sees the currency falling to 6.60 at year-end.
"Chinese policy does not include any further large depreciation in its plans, but speculative short-term flow makes it hard to forecast appreciation," said Brad Gibson, a fund manager at AllianceBernstein in Hong Kong. He helps oversee the AB RMB Income Plus Portfolio fund, which has returned 7.2 percent this year, the most among offshore yuan funds.
While Stratton Street’s Seaman doesn’t forecast a specific exchange rate, he expects the yuan to gain an average 2 to 3 percent each year in the next few decades. He points to the nation’s low foreign debt and its current-account surplus, which at $293 billion last year was the world’s largest. He sees dollar weakness for the rest of the year amid slow U.S. growth and just two rate increases by the Federal Reserve.
Expectations for a slower pace of tightening in the U.S. have put the yuan on the path for its second straight monthly gain, helping to fend off short positions. Policy makers have also gone to extreme lengths to prop up the yuan -- ramping up intervention, clamping down on capital outflows and waging a verbal campaign to restore confidence in the currency.
Authorities broke a vicious cycle earlier this year in which yuan weakness drove outflows and speculative selling, Seaman said.
"There’s a pent-up demand for renminbi. So the more the renminbi appreciates the more exporters are likely to start converting, which will drive the currency higher," he said. "The market rhetoric encouraged exporters not to repatriate those dollars, but what it means is they’ve got a build-up of dollar assets, which they will convert at some point.”
Another source of support will come from overseas funds entering the nation’s bond market as its debt is added to global benchmark indexes, said Seaman. Such inclusion became more likely this year as China removed quotas to invest in its interbank bond market and eased some rules on securities investment programs for foreigners. Up to 10 trillion yuan of cash will enter Chinese bonds in the next five years, Deutsche Bank AG estimates. JPMorgan Chase & Co. said on March 15 that it will review whether to give China a 10 percent weight in its widely tracked emerging-market debt index.
“Once people wake up to the idea that they can access the world’s third-largest bond market, there’s going to be quite a significant move into renminbi assets,” Seaman said. “There needs to be a big adjustment at some point. It’s a question of when, not a question of if."