Turkey's falling currency reserves have turned the country into one of GAM portfolio manager's Paul McNamara top bearish calls, even as the stance has hurt the performance of one of his funds.
Official reserves of Turkey’s central bank have fallen from just under $97.5 billion in May 2016 to $86 billion as of May this year, according to research firm CEIC Data.
McNamara, manager of the GAM Multibond - Local Emerging Bond USD, said the underweight to Turkey has cost him.
He added: ‘Our biggest bearish call by far is Turkey, which we regard as an accident waiting to happen, with banks and government having pumped money into a construction boom, Turkey being the only major country to see currency reserves fall over the past year.'
McNamara the manager of the has offset an Turkey underweight by dialing up exposure to South Africa, which he said was a liquid way to take ‘generic’ emerging market risk.
Elsewhere, the manager has sold Brazilian and Mexican bonds on the back of strong returns, though the two countries remain the largest overweights in the fund.
Mexican bonds should improve based on a positive outlook on the peso as the worst fears about the effects of US president's Donald Trump's administration appear unfounded, McNamara said.
Overall, McNamara is confident on emerging markets as long as external balances remain strong, he said. Even putting China aside, emerging markets are running a trade surplus, in contrast with a $25 billion monthly deficit following the 2013 'taper tantrum,' he added.
Moreover, McNamara doesn't appear to be ready to join other managers' views that emerging market debt has become overvalued.
The US Federal Reserve has said it will unwind the $4.5 trillion balance sheet it amassed following the financial crisis. Withdrawal of dollar liquidity has affected emerging markets in the past, many of which borrow in hard currency.
‘We think emerging market levels make sense compared with other risk asset classes (equity, high yield, etc.),’ McNamara said. ‘It’s fairly easy to suggest that once central banks start withdrawing liquidity, risk appetite globally will fall off and we see no reason why emerging would be immune to this.’
In the past year, McNamara’s fund has returned 7.74%, while its Citywire-assigned benchmark, the Bloomberg Barclays EM LC Govt-10%CountryCap TR USD, has returned 5.96%.