Hedge Fund That Gained 40% Sees Emerging-Market Rally PersistingBy
CEO says Haidar expects EM total returns to rise this year
Biggest danger would come from sharp short-term rate increase
Haidar Capital Management’s global macro hedge fund returned about 12.5 percent last month by betting on emerging markets, commodities and a weaker dollar, a wager that’s unlikely to change unless short-term interest rates spike, said Chief Executive Officer Said Haidar.
The Jupiter Fund is now up 40 percent in the past year, boosted by a decision to short developed-nation bonds in favor of emerging-market debt, currencies and stocks, said Haidar, who manages $431 million. His picks included long bets on China’s H Share futures and MSCI Emerging Markets Index futures.
"I’m sure there will be a pullback, but will we finish the year higher? Absolutely," he said in an interview on Friday, speaking of emerging-market assets. "It’s likely on a total return basis markets will be up."
Emerging markets will outperform developed markets during the next three to four years thanks to cheaper valuations, faster growth and pro-market government overhauls, Haidar said. He compares markets today to the stretch from 2004 to 2006 when the Fed raised rates at a moderate pace and emerging-market assets posted outsized returns.
Global markets sold off Friday as U.S. wage data pointed to quickening inflation, which would lead to higher rates and rising borrowing costs. The MSCI Emerging Markets Index and S&P 500 Index extended that decline today, while bond yields rose across the board.
Here’s what else Haidar had to say about emerging markets:
What could upset the emerging-market rally?
"We don’t see any signs of a big slowdown in global growth now. The other thing that could derail the EM bandwagon is if you get a sharp move higher in interest rates, particularly on the short-end of the yield curve in the U.S. or elsewhere. Then money could flow out of EM. But market liquidity remains high due to enormous central bank balance sheets at the Fed, ECB and BOJ."
What makes countries more resilient this time?
"People think of 1994 as a parallel for EM presently when the Fed, which had kept rates low for too long, hit the brakes and raised rates 350 bps with a few 50 bps rises and led EM to fall apart. Today, most EM countries are in far stronger shape with much larger currency reserves. There are no balance of payment issues. And most importantly, there’s no prospect that the Fed will go hike rates 300 bps. If you look at 2004 to 2006, the Fed kept raising rates 25 bps and the long-end of the yield curve rallied and there was no massive EM blow up. That’s probably a reasonable comparison."
How do you view higher-yielding EM credits?
"You have to look at liquidity. Everyone and their uncle was piling into Egyptian T-Bills, but if something happens, you can’t get out. They tend to be cash-intensive. You have to put up a huge amount of cash to put up a position. Per unit of cash you get more yield on slightly less risky positions and more liquidity. What’s the cash utilization? What’s return on capital? If you’re an all cash fund with no leverage, they may be attractive.
What about Venezuela’s world-leading bond returns?
"I’m surprised people are buying Venezuela. They’ll stuff the ballot box. There’s no way President Nicolas Maduro will let the opposition win. I wouldn’t touch Venezuela right now. Also U.S. sanctions make it difficult."
Will emerging-market defaults become less prevalent?
"EM countries are basically re-emerging markets. They were developed markets of their day for a while but they became emerging due to disastrous populist politics. In 1900, Argentina was one of the wealthiest countries per capita in the world and by 1945 the only way to trade Argentine stocks was brokers had to call others brokers and try to match buyers with sellers as and there was no stock exchange any more. That’s the case with a lot of these EMs.
The U.S. was an EM too, but followed better policies and had a strong English law tradition with an independent judiciary that protected investors. Sovereigns can default any time they want. The cost of default is, how long are they shut out of the market? For most countries, they don’t want to get shut out, but for countries where almost all debt is owned externally, default risk is probably higher. There was the Latin American crisis in the eighties and Asia crisis problems with the Tigers. Since then, a lot of these countries are in much better shape. You probably will have lower defaults."