Bet on the BRICS, but minus the C

TOKYO: Goldman Sachs, home to the team that conceived the BRICS framework for investing in the largest emerging markets, is urging investors to “stay the course” with bets on the currencies of Brazil, Russia and India, along with South Africa.

But when it comes to China, Goldman anticipates a “grinding” move lower for the yuan this year, “analogous to 2016”. Goldman emerging-market strategists in London predicted last Thursday that the yuan would retreat to 7.3 per dollar by year-end. It was trading at 6.8224 on Friday in Hong Kong.

China, South Korea and other Asian economies are vulnerable to US President-elect Donald Trump’s protectionist threats if they become reality. Brazil, Russia, India and South Africa are less at risk, Goldman analysts believe.

“Mapping US ‘swing state’ job losses with emerging-market-US trade flows suggests that these ‘good carry’ candidates appear less likely to face US import restrictions because their exports compete less directly with US labour,” they wrote.

They cited an improving balance of payments, falling inflation, attractive real yields and prospects for stronger growth in the four big emerging markets they favour. “Preferred emerging-market longs can be funded out of non-Japan Asia low-yielders (Korean won, Singapore dollar, Malaysian ringgit) or in non-dollar developed markets (euro, yen, pound),” they wrote.

The yuan could potentially fall even further than 7.3, Goldman said. Accelerated capital outflows, or depreciation as a policy response to Trump, are among the risk scenarios.

“The best times to gain exposure to dollar-yuan weakness have tended to be when China concerns were off radar screens, or after periodic interventions that flushed out bearish speculative positions and provided attractive entry points,” the analysts wrote. “That remains our view today.”

The offshore yuan slumped on Friday as China’s central bank raised its daily fixing by less than projected, and as traders digested the bearish view from Goldman. The currency had jumped in Hong Kong earlier in the week after interbank borrowing rates soared and Bloomberg reported that policymakers were preparing contingency plans to support the exchange rate. The move widened the offshore premium to the onshore rate to 1.6%, the most since February last year.

Benjamin Fuchs, chief investment officer at the $2-billion hedge fund BFAM Partners (Hong Kong), said China’s moves to repeatedly tighten capital controls risk eroding confidence in its currency. The dollar’s advance against the yen and other currencies was also increasing competitive pressure on China to let the yuan depreciate, he said.